US financial watchdog identifies AI as potential risk to financial stability

The US Financial Stability Oversight Council (FSOC), has warned about the rapid adoption of AI in the country’s financial system. In its annual financial stability report, the council acknowledged that AI has the potential to drive innovation and efficiency in financial firms. Still, it emphasised the need for vigilant oversight from companies and regulators to avoid new risks.

The FSOC highlighted several threats that AI can introduce, including safety and soundness risks or cyber and model risks. The report also pointed out the challenges posed by the technical and opaque nature of some AI tools, making it difficult for institutions to monitor and explain them adequately. The FSOC underscored that increasing reliance on large external datasets and third-party vendors in AI tools also introduces privacy and cybersecurity risks.

To address these threats, the council recommended that firms and regulators deepen their expertise and capacity to monitor AI innovation and usage and identify emerging risks in the financial system. Regulatory bodies such as the Securities and Exchange Commission (SEC) are already scrutinising how firms use AI, and the White House has issued an executive order to mitigate AI risks.