Technology and Innovation Community

Latest report from the FPC at BoE titled:

"Financial Stability in Focus: Artificial intelligence in the financial system"

Exec Summary:

• Greater use of AI in banks' and insurers' core financial decision-making (bringing potential risks to systemic institutions)

 While bringing potential benefits to both firms and their customers, such as greater choice and product availability, AI can introduce risks, especially in relation to models and data. Firm-level risk management and microprudential regulation can help mitigate these risks by applying appropriate controls to the use of AI, including agentic AI (that is, systems which can take autonomous action to achieve specified goals by utilising tools, learning from feedback, and adapting to dynamic environments). But there is the potential for systemic consequences to emerge, for example if common weaknesses in widely used models cause many firms to misestimate certain risks and so misprice and misallocate credit as a result. Such common weaknesses could also lead to a loss of service provision for some households or businesses. More widely, a reliance on AI models for key decisions could lead to conduct-related risks, for example if certain decisions or processes were to be subject to legal challenge and financial redress.

• Greater use of AI in financial markets (bringing potential risks to systemic markets)

 Greater use of AI to inform trading and investment decisions could help increase market efficiency. But it could also lead market participants inadvertently to take actions
collectively in such a way that reduces stability. For instance, the potential future use of more advanced AI-based trading strategies could lead to firms taking increasingly
correlated positions and acting in a similar way during a stress, thereby amplifying shocks. Such market instability can then affect the availability and cost of funding for the real economy.

• Operational risks in relation to AI service providers (bringing potential impacts on the operational delivery of vital services)

 Financial institutions generally rely on providers outside the financial sector for AI-related services to develop and deploy AI (just as they do for various other IT services). Reliance on a small number of providers for a given service could lead to systemic risks in the event of disruptions to them, especially if is not feasible to migrate rapidly to alternative providers.

• Changing external cyber threat environment

While AI might increase financial institutions' cyber defensive capabilities, it could also increase malicious actors' capabilities to carry out successful cyberattacks against the financial system. And financial institutions' own use of AI could create new vulnerabilities that actors could exploit.

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