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The increasing use of artificial intelligence has become a significant risk to stocks, bonds and financial markets in general, according to a new report from the US's top financial stability watchdog.
It is the first time AI has been identified as a “vulnerability” by the Financial Stability Oversight Council in its annual report. Treasury Secretary Janet Yellen, who is also chair of the FSOC, predicted at a council meeting on Thursday that the use of AI by banks, investors and other financial market participants will likely continue to grow.
While Yellen called AI a “new threat” to financial stability, she also said she believes existing regulations could be used to curb the technology's potential market risks.
“Supporting responsible innovation in this area can enable the financial system to achieve benefits such as greater efficiency, but there are also existing risk management principles and rules that should be applied,” she said.
In addition to Yellen, the FSOC includes the heads of all major US regulatory agencies.
Gary Gensler, chairman of the Securities and Exchange Commission and a member of the FSOC, told the Financial Times in October that without rapid action from regulators to curb the risks of AI, it was “almost inevitable” that the technology would trigger a financial crisis within one decade.
AI is one of 14 potential risks to financial markets listed in the FSOC's annual report, which Yellen said the council will monitor closely over the next year.
“The use of AI in financial services has increased in recent years, thanks to more advanced algorithms, larger amounts of data, improved data storage and processing power, and cost reductions in many of these dimensions,” a Treasury official told reporters. “AI has the potential to increase efficiency and innovation, but it also poses certain risks.”
FSOC is also monitoring the effects of climate change, which the stability agency added to its watchlist two years ago. After the regional banking turmoil in March, the regulator has also stepped up efforts this year to find ways to identify financial groups other than the country's largest banks that could cause market collapses or credit shortages.
On climate, Yellen said that the FSOC and other regulators have made progress in addressing the risks to financial markets, but there is more work to be done to develop a framework to effectively regulate the issue and protect markets.
“This work is an important step toward fully and permanently integrating climate risk into macroprudential policy to maintain U.S. financial stability and protect the U.S. economy,” Yellen said.
The Bank of England said earlier this month that it was studying the impact of AI on financial stability but had not added the technology to its own list of market risks.
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