Bank of England considers financial stability implications of AI

The Bank of England is closely monitoring the implications of how artificial intelligence is used in financial services. In a new report it highlights the benefits AI can bring but also notes the potential impact it could have on financial stability. The Bank of England pledges to work with the industry to better understand how AI is being used by firms and acknowledges that more regulation may be needed to support the safe adoption of AI.

Reaping the benefits of AI in finance

The report, published by the Bank of England’s Financial Policy Committee, summarises how financial services firms are currently leveraging AI to improve operational efficiency, highlighting the productivity gains it is already bringing to financial institutions.

The report notes how firms are employing AI to benefit their customers by enhancing the range of products offered, improving customer interactions and combatting fraud. It also looks ahead to a world in which AI deployment is not limited to low-risk applications but is more deeply integrated into firms’ core financial decision-making.

Risk landscape and FPC’s areas of focus

The FPC is keeping tabs on four areas which could threaten financial stability in the future:

1. AI in core financial decision-making: Using AI in business functions could have “a direct impact on the financial position of the firm and outcomes for customers”. Existing principles and regulations, such as the Senior Managers and Certification Regime, help address certain firm-level risks. There are also systemic considerations at play, particularly if firms rely on a limited number of model components or data libraries affected by the same weaknesses which could, for example, prompt widespread misestimation of risks.
2. Greater use of AI by financial market participants: AI is already being widely used by market participants and the FPC expects AI to make its way into their core trading and investment activities in the future. The use of complex AI models could impact firms’ readiness to respond in stress situations or lead to unintended consequences if AI trading models behave in a way that disrupts the efficient functioning of financial markets.
3. Impact on operational resilience: The report identifies the financial stability issues connected to firms’ exposure to third parties when using AI, as highlighted in the recent AI Survey. Firms’ increased reliance on external providers supplying AI-related services may lead to these providers becoming critical third parties in the future. 
4. AI-related cyber threats: While AI is helping firms address cybersecurity threats, AI has the potential to exploit firms' vulnerabilities, introduce unprecedented threats, or render existing protections ineffective which could ultimately have systemic implications. The evolution of AI-related cyber risks will be a key aspect of the FPC’s approach to monitoring AI.

Looking ahead 

The Bank of England is “mindful” of the potential need for regulators to “evolve” guidance and regulation to support the safe adoption of AI across the industry. Even where existing regulation can manage firm-level risks, new measures may be needed to mitigate systemic / macroprudential risks. Given the fast pace of technological change, the FPC aims to maintain a flexible and forward-looking to quickly respond to new challenges that could threaten financial stability.