The chair of the US Securities and Exchange Commission (SEC) has warned that financial regulators must quickly find a way to manage the risks posed to financial stability by the concentration of power in artificial intelligence (AI) platforms.
Gary Gensler said that without swift intervention, it was “nearly unavoidable” that AI would trigger a financial crisis within a decade.
According to Financial Times, Gensler said that shaping AI regulation would be a tough test for US regulators, as potential risks cut across financial markets and stem from models crafted by tech companies that sit outside the remit of Wall Street watchdogs.
- “There is a lot of concentration of power in these few AI platforms,” Gensler said. “If one of these platforms were to fail or be hacked, it could have a systemic impact on the financial system.”
Use of AI in financial sector
Gensler’s comments come as AI is increasingly being used in the financial sector for tasks such as fraud detection, risk assessment, and investment management.
- “It’s frankly a hard challenge,” Gensler said. “It’s a hard financial stability issue to address because most of our regulation is about individual institutions, individual banks, individual money market funds, individual brokers; it’s just like what we do. And this is about a horizontal [matter whereby] many institutions might be relying on the same underlying base model or underlying data aggregator.”
The SEC in July proposed a rule addressing potential conflicts of interest in predictive data analytics, but it focused on individual models deployed by broker-dealers and investment advisers.
- Even if current measures were updated, “it still doesn’t get to this horizontal issue, if everybody’s relying on a base model and the base model is sitting not at the broker-dealer, but it’s sitting at one of the big tech companies”, Gensler said. “And how many cloud providers [which tend to offer AI as a service] do we have in this country?”
- He added: “I’ve raised this at the Financial Stability Board. I’ve raised it at the Financial Stability Oversight Council. I think it’s a cross-regulatory challenge”.
Regulators grappling to police AI
Regulators worldwide are grappling with how to police AI, as tech groups and their models are not naturally captured by specific watchdogs.
The EU has moved quickly, drafting tough measures over the use of AI in a groundbreaking law that is set to be fully approved by the end of the year.
The US, however, is reviewing the technology to determine which aspects of it require new regulation and what is subject to existing laws.
But Gensler is concerned that parties basing decisions on the same data model may lead to herd behaviour that would undermine financial stability and unleash the next crisis.
- “I do think we will in the future have a financial crisis, and in the after-action reports people will say ‘Aha! There was either one data aggregator or one model, we’ve relied on’. Maybe it’s in the mortgage market. Maybe it’s in some sector of the equity market,” Gensler said.
- AI’s powerful “economics of networks” makes it “nearly unavoidable,” he added, predicting that a crisis could happen as soon as the late 2020s or early 2030s.
