Supervision in an “AI-Shaped Economy”

In a speech delivered last week at Cambridge University, Fernando Restoy, Chair of the Financial Stability Institute (FSI), called for a shift in how authorities supervise banks in an “AI-shaped economy,” arguing that traditional prudential tools may no longer be sufficient on their own.

While hard financial metrics like capital and liquidity remain indispensable, Restoy emphasized that some emerging risks cannot be fully captured through static assessments or capital ratios. Instead, he argued for greater use of a broader set of instruments — such as business model analysis, strategic reviews, and scenario analysis. To address banks’ strategic vulnerabilities, Restoy argued that qualitative supervisory measures are likely to be more effective than simple capital add-ons.

This evolution places greater emphasis on supervisory judgment. Because AI can create strategic challenges that diverge significantly across firms, supervisory assessments and actions cannot be easily codified ex ante, Restoy said. “Yet the exercise of judgment should be properly framed in a robust supervisory framework that ensures sufficient transparency, consistency across firms and stability over time,” he added.

Restoy also called for a broader approach to AI governance and resilience. The limited explainability of advanced AI models challenges existing expectations around model risk management, validation, and independent review, he said. This may require supervisors to accept trade-offs between explainability and performance where risks are properly assessed and effectively managed.

Beyond banks’ own use of AI, Restoy highlighted wider operational and strategic risks. Frontier AI is shortening the time available to respond to cyber threats, increasing the importance of operational resilience and business continuity. At the same time, even well-capitalized banks could become vulnerable if they fail to adapt their business models to AI-driven changes in the wider economy. “If AI transforms the economy,” he said, “prudential supervision must understand those transformations.”