AI presents growing risk to financial markets, US regulator warns

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The growing use of artificial intelligence has become a significant risk to stocks, bonds and financial markets in general, according to a new report from the chief US financial stability regulator.

It is the first time that AI was identified as a “vulnerability” by the Financial Stability Oversight Council in its annual report. Treasury secretary Janet Yellen, who also chairs the FSOC, on Thursday predicted at a meeting of the council that the use of AI by banks, investors and other financial market players is likely to continue to increase.

While Yellen called AI an “emerging threat” to financial stability, she also said she believed existing regulations could be used to curb the technology’s potential market risks.

“Supporting responsible innovation in this area can allow the financial system to reap benefits like increased efficiency, but there are also existing principles and rules for risk management that should be applied,” she said.

Along with Yellen, the FSOC includes the heads of all of the big US regulators.

Gary Gensler, who chairs the Securities and Exchange Commission and is also on the FSOC, told the Financial Times in October that without swift intervention by regulators to tame the risks of AI, it was “nearly unavoidable” that the technology would trigger a financial crisis within a decade.

AI is one of 14 potential risks to financial markets listed in the FSOC’s annual report that Yellen said the council would monitor closely in the next year.

AI’s “use in financial services has increased in recent years, thanks to more advanced algorithms, increased volumes of data, data storage and processing power improvements and cost reductions among many of these dimensions,” a Treasury official told reporters. “AI has the potential to increase efficiency and innovation, but it also introduces certain risks.”

FSOC is also watching the effects of climate change, which the stability regulator added to its watchlist two years ago. The regulator has also been stepping up its efforts this year after March’s regional banking turmoil to come up with ways to identify other financial groups that could cause market meltdowns or credit crunches besides the nation’s largest banks.

On climate, Yellen said the FSOC and other regulators have made progress addressing the risks to financial markets, but that there was still more work to be done to develop a framework for how to effectively regulate the issue and safeguard markets.

“This work is an important step towards fully and durably integrating climate risk into macroprudential policy, to preserve US financial stability and protect the US economy,” Yellen said.

The Bank of England earlier this month said it was studying the impact of AI on financial stability, but did not add the technology to its own list of market risks.