Emerging AI Risks in the Financial System
The Financial Stability Oversight Council, led by Treasury Secretary Janet Yellen, recently issued a cautionary note in its annual financial stability report about the potential risks associated with the rapid adoption of artificial intelligence (AI) in the U.S. financial system. This marks the first time the council has highlighted AI-related risks.
While acknowledging the potential for innovation and efficiency gains at financial institutions through AI, the council emphasized the necessity for careful supervision. The report underscored that AI introduces various risks, including concerns related to safety, soundness, cyber threats, and model risks. The council recommended that both financial firms and regulators enhance their expertise and capacity to monitor the innovation and usage of AI, identifying emerging risks in the process.
Focus on Nonbanks and Private Credit
Additionally, the panel drew attention to the increasing prominence of nonbanks and private credit, emphasizing the need for vigilant monitoring. It also urged financial institutions and regulators to continue improving their understanding of risks associated with climate change.
The report highlighted the complexity of some AI tools, emphasizing their technical nature and opaqueness, which can make it challenging for institutions to explain or monitor them effectively. The lack of understanding may lead to oversight of biased or inaccurate results. Furthermore, the report noted the growing reliance of AI tools on extensive external datasets and third-party vendors, posing additional concerns related to privacy and cybersecurity risks.
Several regulatory bodies, including the Securities and Exchange Commission (SEC), are actively scrutinizing the use of AI by firms. The White House has also issued an executive order aimed at mitigating AI risks, signaling a broader recognition of the potential challenges associated with AI adoption.
While acknowledging the resilience of the U.S. banking system, despite notable bank failures in the past year, the FSOC emphasized the importance of closely monitoring uninsured bank deposits to prevent potential rapid flight triggering failures.
Read More (AI – Tech Foom)
