US Concerned About AI Risk to the Financial System

Facts

• US federal regulators issued a warning on Thursday, the first of its kind, about the potential harm artificial intelligence (AI) could have on the financial system. The Financial Stability Oversight Council formally characterized AI as an 'emerging vulnerability.'¹
• Treasury Secretary Janet Yellen signaled that American oversight agencies would prioritize AI and the threats the technology may pose in 2024. In October, President Joe Biden issued an executive order establishing privacy and security rules for AI.²
• In its annual report, the Council stated that although AI holds great potential for cost savings, increased productivity, and other advantages, it can also 'introduce certain risks, including safety-and-soundness.'³
• It is feared that financial institutions could overlook biased or erroneous results and potentially roll back transparency if the models operate as a 'black box.'⁴
• In May, a viral AI-generated image that appeared to depict an explosion close to the Pentagon briefly triggered tremors in the stock market and a momentary sell-off. Officials expressed concerns about bad actors manipulating markets on Thursday.⁵
• Despite turbulence earlier this year around the failure of some US regional lenders, the annual study concluded that the US banking sector is robust and the financial system is resilient.⁶

Sources: ¹CNN (a), ²Bloomberglaw, ³Al Jazeera, ⁴CNN (b), ⁵CBS and ⁶The economic times.

Narratives

• Narrative A, as provided by CNN. Artificial intelligence in financial services needs to be carefully implemented and supervised. It's wise for US regulatory agencies to have issued a warning and identified AI as a potential vulnerability. The financial system may suffer greatly if the application of advanced models is left unchecked — be it from bad actors or the obtuse complexities of the systems themselves. Consumers could pay a huge price.
• Narrative B, as provided by Ey. AI technology has made tremendous improvements to the financial sector and has become essential in the battle against financial crime and fraud. It's an effective method for risk assessments that can assist banks in predicting loan defaults and stop insurers from overpaying claims. Overall, the benefits of AI in the financial sector greatly outweigh the risks.

Predictions