Regulators add AI to list of financial stability risks

For the first time, the Financial Stability Oversight Council has labeled the use of artificial intelligence in financial services as an emerging vulnerability in the financial system. The FSOC this week released its annual report on financial risks, and new this year was the inclusion of AI, which the council said has the potential to spur innovation and drive efficiency, “but its use in financial services requires thoughtful implementation and supervision to manage potential risks.”

“Generative AI models use large datasets to identify patterns that allow the generation of new content including text, software code, images and other media,” FSOC said in the report. “Many AI approaches present ‘explainability’ challenges that make it difficult to assess the suitability and reliability of AI models and to assess the accuracy and potential bias of AI output. In addition, the reliance of AI systems on large datasets and third-party vendors introduces operational risks related to data controls, privacy and cybersecurity.”

The FSOC is also continuing to monitor cybersecurity risk and climate-related financial risk, “particularly in light of the growing number of cybersecurity incidents and climate-related events.” In addition, the council removed Libor-related vulnerability from this year’s report “following the progress made in transitioning to more robust alternative reference rates.”