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

A risk manager at an asset manager notes that many firms are adopting generative AI mainly through a small number of third-party foundation model providers. Which risk does this adoption pattern most directly increase from a financial stability perspective?

Reliance on a few third-party AI providers raises concentration and third-party dependency risk. A failure, cyberattack or flaw at one provider could affect many institutions simultaneously, making it a systemic concern. It also tends to increase correlated behaviour rather than reduce it.

  1. AHigher concentration and third-party dependency risk across institutionsCorrect
  2. BLower correlation of trading decisions across firms
  3. CReduced operational risk because providers are specialised
  4. DLower model risk because models are widely tested by many users

Explanation

If many firms rely on the same few providers, an outage, flaw or cyberattack at a provider can hit many institutions at once, creating concentration and systemic third-party risk. Common models also tend to raise, not lower, correlation of behaviour. Wide use does not eliminate model risk.

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