The increasing use of artificial intelligence (AI) and machine learning by financial firms could enhance the efficiency of the financial system, but it also creates the potential for new systemic risks by intensifying interconnectedness and increasing firms' reliance on opaque models, says a report from the Financial Stability Board (FSB) released on Wednesday. Meanwhile, hedge funds, broker-dealers and other firms are using it to find signals for higher uncorrelated returns and to optimise trade execution.
"A few large technology firms" central to the AI services could become "systemically important players" in the financial system, the FSB said, highlighting "the potential for natural monopolies or oligopolies".
"The lack of interpretability or auditability of AI and machine learning methods could become a macro-level risk", the report adds.
The report noted that AI and machine learning - which were on the ABA Banking Journal's list of six fintech trends that will reshape banking over the next decade - are being deployed by financial institutions to assess credit quality, automate client interaction, optimize capital levels, comply with regulations and detect fraud.
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Regulators are also concerned that major suppliers of AI and machine learning tools to financial services firms may "fall outside the regulator perimeter or may not be familiar with applicable law and regulation".
Applications of AI and machine learning could result in new and unexpected forms of interconnectedness between financial markets and institutions, for instance based on the use by various institutions of previously unrelated data sources.
Network effects and scalability of new technologies may in the future give rise to third-party dependencies.
Says the FSB: "As with any new product or service, it will be important to assess uses of AI and machine learning in view of their risks, including adherence to relevant protocols on data privacy, conduct risks, and cybersecurity". It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, worldwide financial institutions, sector-specific global groupings of regulators and supervisors, and committees of central bank experts.
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