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

A supervisor is designing a framework to address AI-related financial stability risks. Which combination of measures would most directly address both opacity of complex models and the build-up of common-provider concentration?

Requiring explainability and validation for material AI models, together with oversight of critical third-party AI providers and credible exit and substitution plans, addresses both opacity and concentration. A single mandated model would increase homogeneity and worsen systemic risk.

  1. ARequire explainability and validation standards for material AI models, and monitor and set oversight expectations for critical third-party AI providers, including exit and substitution plansCorrect
  2. BBan all AI use in trading and rely exclusively on manual execution to remove model risk
  3. CIncrease minimum capital only for retail mortgage exposures and leave AI governance to vendors
  4. DRequire firms to use one single approved AI model so that outputs are uniform across the sector

Explanation

Explainability and validation tackle opacity, while oversight of critical providers and exit plans tackle concentration. Mandating one model would worsen homogeneity and concentration, a blanket ban is disproportionate, and mortgage capital is unrelated to the AI risks described.

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