"AI, Risk to Financial Systems"… First Warning from US FSOC

Annual Report Identifies New 'Vulnerabilities'
Yellen: "Added to Next Year's Watchlist
Will Monitor Closely
Controllable with Existing Regulations"

For the first time, U.S. financial regulators have identified artificial intelligence (AI) as a risk factor to the new financial system. AI was cited as one of the major variables undermining financial system stability, alongside climate change and virtual assets.

According to major foreign media on the 14th (local time), the Financial Stability Oversight Council (FSOC) under the U.S. Department of the Treasury added the spread of AI usage as a new "vulnerability" to the financial system in its annual report released that day. FSOC is a regulatory body established shortly after the 2008 global financial crisis to oversee the stability of the U.S. financial system. Key financial regulatory agencies such as the Treasury Department, the Federal Reserve (Fed), and the Securities and Exchange Commission (SEC) participate in FSOC.

This is the first time FSOC has officially mentioned the risks of AI to financial markets. In the report, FSOC warned that "the increasing use of AI could pose serious risks across financial markets, including stocks and bonds."

U.S. Treasury Secretary Janet Yellen is seen talking with Gary Gensler, Chairman of the Securities and Exchange Commission (SEC), at a meeting of the Financial Stability Oversight Council (FOSC) held on the 14th (local time) in Washington, DC. In its annual report released that day, the FOSC identified artificial intelligence (AI) as a potential threat to financial system stability, alongside climate change, banking sector crises, cybersecurity, and virtual assets. Washington DC=Photo by AFP

FSOC also pointed out generative AI models like ChatGPT. It highlighted issues such as data security, consumer protection, privacy risks that may arise as financial institutions adopt generative AI, as well as hallucination phenomena caused by generative AI.

In particular, FSOC expressed concern that some AI models could operate like a "black box," inaccessible from outside to internal operations. FSOC emphasized, "This lack of explainability makes it difficult to assess the conceptual soundness of the financial system and increases uncertainty regarding suitability and reliability."

This warning came amid accelerated AI adoption across the private sector and Wall Street’s integration of AI in various ways, including robo-advising, account opening processes, and brokerage apps.

Janet Yellen, Treasury Secretary and head of FSOC, stated at the FSOC meeting held that day that the use of AI by financial firms, investors, and market participants will continue to increase, and that AI will be added to next year’s financial market surveillance list for close monitoring. However, she did not designate AI as a regulatory target. Secretary Yellen said, "While AI is a new threat to financial stability, existing regulations can control (potential risks)."

This FSOC warning was made as a cautionary measure regarding AI’s potential risks. Just as FSOC previously identified climate change as a new threat to U.S. financial stability in October 2021 and has been monitoring related risks, it plans to promote a framework to measure, assess, and manage AI’s potential threats.

The SEC has also long warned about AI risks. Gary Gensler, SEC Chairman, pointed out in an interview with a British media outlet last October that a second global financial crisis could occur due to AI-related threats to financial stability.

He urged that "without swift intervention by authorities, it will be impossible to avoid AI triggering a financial crisis within 10 years," and called for quickly finding ways to manage financial stability amid the concentration of power in AI platforms. He also expressed concern that the potential risks of AI, which could impact Wall Street broadly, originate from technology companies beyond the reach of regulatory agencies, making it a significant challenge.

Not only securities regulators but also competition authorities and lawmakers are sharpening regulatory measures against AI. The White House issued an executive order on October 30 to ensure the orderly development of AI and prevent side effects from the technology, and the U.S. Congress has begun discussions on AI regulation proposals. The Federal Trade Commission (FTC) is investigating OpenAI, the developer of ChatGPT that is driving the AI boom, for potential violations of consumer protection laws.

This content was produced with the assistance of AI translation services.