Artificial Intelligence has been flagged, for the first time, for its risk in the U.S. financial system, as per the annual financial stability report of the Financial Stability Oversight Council, Reuters reports.
The report states that while AI has the potential to drive innovation and efficiency at financial institutions such as banks, the fast advancement of the technology necessitates caution from both corporations and their regulatory bodies.
AI's risks were stated due to certain AI technologies being quite complex and opaque, making it difficult for organizations to adequately explain it or keep an eye out for any issues; the risks then ensue as corporations and authorities may overlook biased or erroneous findings if a firm does not have a thorough understanding of AI's capabilities.
Consequently, the Council advises businesses and their regulators to expand their knowledge and ability to monitor AI innovation and usage and spot new concerns. AI can bring certain risks, including safety and soundness issues like cyber and model risks.
The Council observes that current regulations and guidelines could apply to AI. It suggests keeping an eye on the technology's quick advancements to ensure oversight frameworks consider new dangers to the financial system while also encouraging innovation and efficiency.
AI's risks in different aspects have been consistently monitored during the AI boom, most notably the European Union's nearly finalized 'AI Act,' and the White House recently releasing an executive order meant to reduce the risk associated with the technology.
Climate Change on Financial Systems
Aside from AI, Reuters states that the panel also recommends financial institutions and authorities keep working on improving their ability to assess the risks associated with climate change.
A framework for identifying and evaluating these climate change-related risks is reportedly being developed by the Council's Climate-related Financial Risk Committee (CFRC), and the Council suggests that data and risk assessment be better coordinated through the CFRC.
The Council also suggests that federal and state agencies keep working together to identify, rank, and get the data needed to track financial risks associated with climate change. Financial authorities should also encourage uniform, comparable, and relevant disclosures so that investors and financial institutions may consider climate-related financial risks when making lending and investment choices.
Digitalized Assets on Financial Systems
Additionally, the risks of financial stability in terms of the ever-growing digitalized landscape have also been stated by the Council. The report observes that operational risks, the possibility of runs on stablecoins and crypto-asset platforms, the degree of sector interconnection, the market's heavy reliance on debt, and volatility in crypto-asset prices can all lead to weaknesses in financial stability.
The concentration of token ownership, cybersecurity threats, and the growth of platforms operating illegally or violating existing rules and regulations can all lead to vulnerabilities. The Council reportedly stresses how critical it is that agencies keep up their enforcement of the laws and policies now in place that are relevant to the crypto-asset ecosystem.
The Council then reinstated its advice to Congress to enact laws governing the regulation of stablecoins and the spot market for non-security cryptoassets.
