AI Tagged As A Potential Risk To Financial Markets By US Regulator

FSOC labels artificial intelligence a key risk in finance, signaling heightened regulatory focus on AI's market impact.

What risks does AI pose to financial markets?

The Financial Stability Oversight Council (FSOC), a chief US financial stability regulator, has for the first time identified artificial intelligence as a significant risk to financial markets, including stocks and bonds, in its latest annual report.

AI: An Emerging Threat In Finance

The FSOC's annual report marks the first official recognition of AI as a "vulnerability" in the financial sector. Treasury Secretary Janet Yellen, who chairs the FSOC, indicated at a recent council meeting that the adoption of AI by banks, investors, and other market participants is expected to grow further. Yellen highlighted AI as an emerging threat but also expressed confidence that existing regulations could mitigate potential market risks associated with the technology.

Treasury Secretary Janet Yellen
Treasury Secretary Janet Yellen (Photo: dpa)

Regulatory Perspectives On AI's Risks

Gary Gensler, the Chair of the Securities and Exchange Commission and FSOC member, warned in an October interview with the Financial Times of the urgent need for regulatory intervention to control AI's risks. He suggested that without prompt action, AI could likely cause a financial crisis within the next decade. AI is now one of 14 potential risks to financial markets that the FSOC plans to closely monitor over the coming year.

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Broader Implications And Other Risks

The FSOC report highlights AI's growing use in financial services, driven by advances in algorithms, data volume, storage, processing power, and cost reductions. While acknowledging AI's potential for increased efficiency and innovation, the report also emphasizes the need for careful risk management. In addition to AI, the FSOC continues to monitor other significant risks like climate change, which was added to its watchlist two years ago. The FSOC's efforts have intensified this year, particularly following regional banking disturbances in March, to identify entities beyond large banks that could trigger market disruptions or credit crunches.

FSOC's perspective on the use of AI in financial services (Source: 2023 Annual Report)
FSOC's perspective on the use of AI in financial services (Source: 2023 Annual Report)

Climate Risk And Regulatory Progress

Yellen noted that while progress has been made in addressing climate-related risks to financial markets, further work is required to develop an effective regulatory framework. This initiative aims to integrate climate risk into macroprudential policy to protect US financial stability and the economy. Meanwhile, the Bank of England also acknowledged the impact of AI on financial stability, although it has not yet added AI to its list of market risks.

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