This post was originally published on Finextra (Security)
As firms integrate more advanced AI-based analysis into their core trading and investment activities, regulators need to vigilant about potential financial stability risks, the Bank of England’s Financial Policy Committee warns.
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With market participants around the world investing billions of dollars into AI efforts, regulators are working to balance support for innovation and managing potential risks.
The Financial Policy Committee has highlighted several such risks. Among them is that unknown data or model flaws might mean that a company’s exposures turn out to have been incorrectly measured or interpreted.
Equally, the widespread use of a small number of open-source or vendor-provided models or underlying data sets risks seeing firms take correlated positions and acting in a similar way during a stress, thereby amplifying shocks.
The reliance on a small number of venders or a given service could also generate systemic risks in the event of disruptions to them, especially if is not feasible to migrate rapidly to alternative providers.
Writes the committee: “For example, under a scenario in which customer-facing functions have become heavily reliant on vendor-provided AI models, a widespread outage
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