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

A supervisor notes that most banks in her jurisdiction use AI models from the same two cloud and model providers. Which vulnerability identified by the FSB does this observation most directly represent, and which policy response fits it best?

This is third-party dependency and service provider concentration. The suitable response is to review whether existing oversight frameworks for critical third parties are adequate and strengthen them, rather than change trading capital, impose position limits, or force banks to build proprietary models.

  1. AModel risk and data quality; require larger trading book capital
  2. BThird-party dependencies and service provider concentration; assess existing oversight frameworks for critical third parties and enhance them where neededCorrect
  3. CMarket correlations; impose position limits on equity trading
  4. DCyber risk only; require every bank to build its own proprietary AI model

Explanation

Common reliance on few providers is a third-party dependency and concentration vulnerability. The FSB recommends assessing whether current regulatory and supervisory frameworks adequately address these risks and enhancing them if needed. Mandating proprietary models is not recommended and could raise other risks, and capital or position limits do not target the issue.

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