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FRM Part II · FRM Exam Part II · The Financial Stability Implications of Artificial Intelligence

A mid-sized bank builds its credit-decisioning and fraud-detection tools on foundation models supplied by two AI vendors. Which of the following best describes why the FSB identifies this arrangement as a potential financial stability vulnerability?

The key stability concern is that many institutions depend on the same few AI providers, so a failure, outage or flaw at one provider could cause correlated operational disruption across the financial system, creating a common point of failure.

  1. AMany institutions relying on the same few AI service providers could suffer correlated operational failures or disruptions if a provider failsCorrect
  2. BFoundation models always produce lower accuracy than in-house models, which raises each bank's credit losses
  3. COutsourcing AI to vendors removes the bank's responsibility for model risk under supervisory guidance
  4. DVendor-supplied models cannot be validated because they use machine learning techniques

Explanation

The FSB highlights that third-party dependencies and service provider concentration in AI (models, data, cloud and hardware) can create common points of failure across institutions. Accuracy claims in the other options are not the stated concern. Responsibility for risk remains with the financial institution even when outsourced.

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