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

Several banks adopt AI tools built on the same small number of third-party foundation models supplied by a few cloud and AI vendors. Which financial stability vulnerability does this most directly illustrate?

This illustrates third-party dependency and service provider concentration. When many banks rely on the same few AI vendors or foundation models, one outage, flaw or cyberattack can hit many institutions at once, raising systemic operational risk rather than reducing it.

  1. AReduced model risk because vendors test models more extensively
  2. BThird-party dependency and service provider concentration, where a single vendor failure or flaw could affect many institutions simultaneouslyCorrect
  3. CLower correlation of trading strategies across firms
  4. DElimination of operational risk through diversification

Explanation

The FSB identifies third-party dependencies and service provider concentration as a key AI vulnerability. Shared providers mean a common outage, error or cyberattack can hit many firms at once, increasing systemic operational risk. Option C is opposite: shared models tend to raise correlation.

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