AI can oil financial markets, but call goes out to manage risks

Meanwhile, a lack of interpretability or auditability of AI and machine learning methods could become a macro-level risk.

The Financial Stability Board (FSB) today published a report that considers the financial stability implications of the growing use of artificial intelligence (AI) and machine learning in financial services.

Hedge funds, broker-dealers and other firms are using it to find signals for higher, uncorrelated returns and to optimise trade execution.

Banks, insurers and asset managers are rushing to swap humans with computer systems able to do the same jobs, with "smart" robots able to crunch data, automate client interaction, spot fraud or price insurance contracts.

However, the potential benefits of AI and machine learning to the financial sector are believed to be considerable, allowing companies to process information more quickly and improve customer interactions - delivering swifter credit decisions, for example.

Regulators are also concerned that major suppliers of AI and machine learning tools to financial services firms may "fall outside the regulator perimeter or may not be familiar with applicable law and regulation".

Finally, with use cases by regulators and supervisors, there is potential to increase supervisory effectiveness and perform better systemic-risk analysis in financial markets, the FSB said.

The report added: "These competition issues - relevant enough from the perspective of economic efficiency - could be translated into financial stability risks if and when such technology firms have a large market share in specific financial market segments".

However, the FSB warned that AI and machine learning solutions can be "black boxes" not fully understood by bankers using them.

"In particular, it may be hard for human users at financial institutions - and for regulators - to grasp how decisions, such as those for trading and investment, have been formulated".

Network effects and scalability of new technologies may in the future give rise to third-party dependencies.

In terms of new risks, the use of AI and machine learning could result in "new and unexpected forms of interconnectedness between financial markets and institutions", the report says.

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