Artificial intelligence and financial crises

TL;DR

This paper uses a game-theoretic model to analyze how artificial intelligence amplifies financial system vulnerabilities, leading to faster, more severe crises, and suggests regulatory responses to mitigate these risks.

Contribution

It introduces a game-theoretic framework to understand AI's impact on financial stability and proposes specific policy measures for authorities to address emerging risks.

Findings

AI amplifies leverage, liquidity stress, and opacity in financial systems.

Crises become faster and more severe with AI integration.

Effective authority engagement with AI reduces crisis likelihood.

Abstract

The rapid adoption of artificial intelligence (AI) poses new and poorly understood threats to financial stability. We use a game-theoretic model to analyse the stability impact of AI, finding that it amplifies existing financial system vulnerabilities - leverage, liquidity stress and opacity - through superior information processing, common data, speed and strategic complementarities. The consequence is crises become faster and more severe, where the likelihood of a crisis is directly affected by how effectively the authorities engage with AI. In response, we propose that the financial authorities develop their own AI systems and expertise, establish direct AI-to-AI communication, implement automated crisis facilities and monitor AI use.