US identifies use of AI as risk in financial system

There is a need to monitor “rapid developments in AI, including generative AI, to ensure that oversight structures keep up with or stay ahead of emerging risks to the financial system,” said the Financial Stability Oversight Council (FSOC) in its annual report.

Generative AI software can quickly produce text, images and audio from simple commands in everyday language.

“As financial institutions continue to evaluate and adopt innovative technologies, uptake of AI could accelerate,” said Treasury Secretary Janet Yellen, who chairs the council, on Thursday.

Speaking at a council meeting, she added: “Supporting responsible innovation in this area can allow the financial system to reap benefits like increased efficiency, but there are also existing principles and rules for risk management that should be applied.”

The FSOC was created in the wake of the 2008 global financial crisis, and other members include the chairs of the Federal Reserve, as well as the Securities and Exchange Commission.

The annual report found that the U.S. financial system is resilient and the banking system remains sound — despite turmoil earlier this year involving the collapse of some US regional lenders.

For now, the council supports plans to review if capital measures properly reflect an institution’s ability to absorb losses, and recommended that banking agencies closely monitor uninsured deposit levels.

It also called for financial institutions and regulators to boost their ability to monitor AI innovation, and identify emerging risks.

Other recommendations include pushing for data collection so that authorities can monitor climate-related financial threats, as well as to pass legislation allowing stablecoins to be regulated.

Stablecoins are cryptocurrencies typically pegged to stable assets such as the US dollar to prevent drastic movements in prices.