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

A supervisor reviews a survey showing that 70% of banks in a jurisdiction rely on the same two cloud and AI model providers for credit scoring. Which vulnerability identified in the FSB's AI report is most directly raised, and what monitoring response is most consistent with its recommendations?

The scenario shows third-party dependency and service provider concentration. The consistent response is to monitor how concentrated providers are and how critical they are to the sector, since a failure or flaw at one provider could hit many banks simultaneously, which VaR or cyber testing alone would not reveal.

  1. AMarket correlations from common models; monitor by tracking only trading-book VaR at each bank
  2. BThird-party dependencies and service provider concentration; monitor by assessing the concentration of providers and their criticality to the sectorCorrect
  3. CCyber risk only; monitor by requiring banks to test penetration defenses annually
  4. DDisclosure failures; monitor by requiring AI firms to publish their source code

Explanation

Common reliance on a few providers is a third-party dependency and concentration vulnerability. The FSB suggests monitoring such concentration and criticality, and reviewing whether existing frameworks capture these risks. Trading VaR does not capture credit-scoring dependence; cyber testing and source code publication address different issues.

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