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

Several banks and insurers rely on the same third-party AI model provider hosted on one cloud platform. From a financial stability perspective, which cyber-related concern is most directly raised by this setup?

Heavy reliance on one AI or cloud provider creates concentration and a common point of failure. A cyberattack or outage there could hit many financial institutions simultaneously, producing correlated operational disruption and raising systemic risk, rather than diversifying it.

  1. AA successful attack or outage at the provider could affect many institutions at once, creating correlated operational failuresCorrect
  2. BDiversification across institutions will automatically eliminate operational risk
  3. CEach firm's idiosyncratic risk will increase while systemic risk falls
  4. DRegulators will be unable to observe any market prices

Explanation

Concentration in a few AI and cloud providers creates a common point of failure, so a cyber incident can propagate across firms simultaneously. This is a systemic third-party dependency issue. Shared reliance does not eliminate risk or reduce systemic risk, and it has no bearing on price observability.

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