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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A regulator observes that many asset managers and banks are building trading and risk tools on the same small number of third-party foundation models supplied by a few vendors. Which financial stability concern is most directly raised by this pattern?

The main concern is concentration and third-party dependency risk. When many institutions use the same few AI model providers, one outage, cyberattack or embedded flaw can hit many firms at once, creating a common point of failure that amplifies systemic risk.

  1. AConcentration and third-party dependency risk, where a failure or flaw at one provider could affect many institutions at onceCorrect
  2. BLower market liquidity caused by a reduction in the number of exchange-traded products
  3. CHigher credit risk in retail loan portfolios because borrowers lose access to credit scoring
  4. DReduced interest rate risk because model providers hedge duration on behalf of clients

Explanation

Reliance on a few common AI providers creates concentration and operational dependency, so a single outage, cyberattack or model flaw can transmit across many firms simultaneously. The other options describe effects that are not linked to shared vendor reliance.

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