On the use of artificial intelligence in financial regulations and the impact on financial stability

TL;DR

This paper discusses how artificial intelligence can both threaten and enhance financial stability, emphasizing risks from malicious use and the potential for AI to be adopted stealthily for high-level financial functions.

Contribution

It introduces six criteria to evaluate the suitability of AI in financial regulation and stability contexts, highlighting the challenges and risks involved.

Findings

AI can undermine financial stability through malicious use and misinformation.

Financial crises' rarity and unpredictability hinder machine learning effectiveness.

AI is likely to be adopted covertly for high-level functions due to cost and performance benefits.

Abstract

Artificial intelligence (AI) can undermine financial stability because of malicious use, misinformation, misalignment, and the AI analytics market structure. The low frequency and uniqueness of financial crises, coupled with mutable and unclear objectives, frustrate machine learning. Even if the authorities prefer a conservative approach to AI adoption, it will likely become widely used by stealth, taking over increasingly high-level functions driven by significant cost efficiencies and superior performance. We propose six criteria for judging the suitability of AI.