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

A risk manager is reviewing a bank's use of a complex deep-learning model to flag potentially manipulative trading. Regulators ask the firm to explain why specific accounts were flagged. Which action best addresses this model risk concern?

The firm should use explainability techniques to document what drives individual alerts and subject the model to independent validation. This addresses the opacity of deep learning and supports regulatory scrutiny, whereas adding complexity or relying on vendor claims leaves the explainability gap unresolved.

  1. AIncrease the number of hidden layers to improve accuracy
  2. BApply explainability techniques and document the key drivers of individual alerts, alongside independent validationCorrect
  3. CStop retraining the model so its behavior stays constant
  4. DRely on the vendor's assurance of accuracy without testing

Explanation

Opaque models create explainability and accountability gaps. Explainability tools plus documentation and independent validation let the firm justify alerts to supervisors. More layers worsen opacity, and vendor assurances do not replace validation.

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