The use of artificial intelligence (AI) in financial markets has been flagged as a potential danger by the Federal Reserve, the top US financial stability regulator. The Financial Stability Oversight Council (FSOC) raised this worry in its annual report, making AI the first time it was referred to as a “vulnerability.”
Treasury Secretary Janet Yellen, who chairs the FSOC, expressed her apprehensions about the growing influence of AI in financial sectors during a council meeting. She termed AI as an “emerging threat” to financial stability, predicting a continued rise in its adoption by banks, investors, and other market participants.
While acknowledging the potential benefits of AI, Yellen emphasized the need to address its associated risks. She stated, “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.”
The FSOC, comprising the heads of major US regulators, listed AI among 14 potential risks to financial markets in its annual report. The report highlighted the increased use of AI in financial services due to advanced algorithms, expanded data volumes, improvements in data storage and processing power, and cost reductions. While AI brings potential for efficiency and innovation, it also introduces certain risks that need monitoring.
Gary Gensler, SEC Chair and FSOC member, had previously expressed concerns about AI’s risks triggering a financial crisis within a decade if not addressed promptly. The FSOC’s focus on AI aligns with its broader efforts to identify potential threats to financial stability, including the impact of climate change, which has been on its watchlist for two years.
Yellen noted that progress has been made in addressing climate-related risks to financial markets. However, she emphasized the ongoing work required to develop an effective regulatory framework for managing climate risks and ensuring the stability of US financial markets.
