In a column published earlier this summer in CEPR, Jon Danielsson, Director of the Systemic Risk Centre at the London School of Economics, and Andreas Uthemann, Principal Researcher at the Bank of Canada, discuss the potential impact of AI on the stability of the financial system.
"Both the private and the public financial sectors are expanding their use of artificial intelligence (AI)," they write. "Because AI processes information much faster than humans, it may help cause more frequent and more intense financial crises than those we have seen so far. But it could also do the opposite and act to stabilise the system."
Danielsson and Uthemann identify four channels through which AI could destabilize the financial system: misinformation, malicious use, misalignment with human objectives, and the oligopolistic market structure. AI's reliance on vast amounts of data, mostly from normal market conditions rather than extreme events, further complicated its effectiveness in crisis scenarios. They note that AI is unlikely to create new fundamental causes of crises, but will likely amplify existing ones.
"If financial regulations are to be effective, crises should be prevented in the first place," Danielsson and Uthemann argue. "Consequently, it is almost axiomatic that crises happen where the authorities are not looking. Since the financial system is infinitely complex, there are many areas where risk can build up."
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