RBI Raises Concerns Over AI's Impact On Financial Stability

According to Cointelegraph, the Reserve Bank of India (RBI) has raised concerns about the potential impact of artificial intelligence (AI) on financial stability. Speaking at an event in New Delhi on October 14, RBI Governor Shaktikanta Das highlighted the risks associated with the increasing use of AI and machine learning in financial services. Das pointed out that the dominance of a few large technology providers could lead to systemic risks if AI systems fail or experience disruptions across the industry. While AI offers benefits such as improved customer service and reduced costs, Das warned of new vulnerabilities, including cyberattacks, data breaches, and the challenge of auditing opaque AI-driven algorithms. These concerns are not unique to India. In a July report, the European Central Bank (ECB) also expressed worries about the impact of AI on financial stability. The ECB noted that while AI brings benefits, the concentration of AI suppliers and widespread use in the financial sector could increase operational risk, market concentration, and too-big-to-fail externalities. The ECB warned that widespread AI adoption could lead to herd behavior, market manipulation, and inflationary pressures. One example cited was the inflated demand for energy worldwide due to the computational power required for sustaining AI, which could push up energy costs. More recently, on September 20, the Central Bank of Canada released a brief on its concerns regarding AI and financial instability. The report highlighted that AI adoption could lead to financial stability issues, particularly as banks and financial institutions invest in AI to improve customer service, enhance compliance and risk management, and better assess credit and liquidity risk. However, it also pointed to operational risks becoming concentrated in a few third-party service providers and spreading through the entire financial system. The predictive ability of AI can deteriorate unexpectedly, suffer from hallucinations, or be biased and discriminatory. Additionally, AI can amplify severe market runs and herding behavior in times of market volatility. As AI continues to penetrate the financial sector, central banks and financial regulators globally are urging collaboration between financial institutions, regulators, and tech developers to mitigate these risks and safeguard the long-term stability of the global financial system.