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

Which statement best describes why herding from AI use is a systemic rather than only a firm-level concern?

Herding is systemic because correlated actions by many institutions can amplify shocks across the financial system. Each firm's controls may look adequate individually, yet collective similar behaviour creates common exposures that individual model validation cannot remove.

  1. ACorrelated actions across many institutions can amplify shocks through the financial system, which a single firm's risk controls may not captureCorrect
  2. BIt matters only if a single firm's model is wrong
  3. CIt affects only retail investors, not institutions
  4. DIt is eliminated by each firm validating its own model

Explanation

Systemic risk arises from interactions: each firm may look prudent individually, but collective, similar behaviour can amplify shocks. Individual validation does not remove common exposures.

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