Financial Markets Are “Vulnerable” to AI Threats

A new regulatory report notes AI is a “growing risk” to global financial markets.

The U.S. Department of the Treasury’s Financial Stability Oversight Council is out with its latest annual report, and it has a lot to say about artificial intelligence risks in the nation’s financial markets.

While the FSOC cites AI’s “benefits”, such as reducing costs and improving inefficiencies, the annual report says the technology has ample potential downsides as well.

“The use of AI (in financial markets) has certain risks, including safety and soundness risks like cyber and model risks,” the paper states. “Other potential issues include consumer compliance risks which can be exacerbated by certain characteristics of many AI approaches, such as difficulty explaining the model or understanding how it functions. Some AI approaches operate as “black boxes”, which can create challenges in explaining how the technology produces its output.”

The report also notes potential problems with generative AI in the finance sector, primarily in the production of data output that’s “erroneous or flawed” but still in the form of a “convincing narrative”.

“Given the possibility that such hallucinations may appear in output that’s nuanced, assessing the performance of output may not be straightforward and may require an expert to properly evaluate the output’s accuracy,” the council stated.

The FSOC recommends “monitoring the rapid developments in AI, including generative AI, to ensure that oversight structures keep up with or stay ahead of emerging risks to the financial system.”

It also recommends that financial services companies take on more regulatory responsibility of AI, “to monitor innovation and identify emerging risks.”

The Treasury Secretary Weighs In

U.S. Treasury Secretary and FSOC Chair Janet Yellen noted in a council meeting this week that AI usage will only increase in the U.S. financial services sector and that AI represents “an emerging threat” as usage rises.

While noting that “existing regulations” should suffice in keeping AI out of harm’s way, Yellen said the FSOC needs to be vigilant on AI.

“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.

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