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

A regional bank is designing controls for its reliance on an external AI vendor for fraud detection. Which control best addresses the concern, highlighted in the FSB's discussion of third-party risk, that firms have limited visibility into how vendors build and operate their models?

The best control is negotiating contractual audit, information-access and exit provisions and testing fallback arrangements. This gives the bank visibility into vendor models and the ability to substitute or revert if the vendor fails, directly addressing opacity and lock-in, unlike relying on marketing claims or increasing dependency.

  1. ARelying on the vendor's marketing materials as evidence of model performance
  2. BNegotiating contractual audit, information-access and exit/substitutability provisions, and testing fallback capabilityCorrect
  3. CIncreasing the volume of transactions routed to the vendor to improve its training data
  4. DRemoving the vendor from the bank's inventory of material third-party services to simplify reporting

Explanation

Limited transparency and lock-in are mitigated by contractual rights to information and audit, plus exit plans and tested fallback options. Marketing claims give no assurance, routing more volume deepens dependency, and omitting the vendor from the inventory hides a material risk.

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