Bank of England Speech on Artificial Intelligence and Financial Stability

The Bank of England has published a speech by Sarah Breeden, BoE Deputy Governor, Financial Stability, on AI and financial stability. In the speech, Ms. Breeden explores the novel features of Generative AI, and how financial stability can be upheld whilst harnessing its potential benefits for economic growth.

In the speech, she notes that while the financial services industry is in the early stages of adopting GenAI, it needs to keep a watchful eye on two issues: (i) on the microprudential level, central banks and financial regulators should continue to assure themselves that technology-agnostic regulatory frameworks are sufficient to mitigate the financial stability risks from AI, as models become ever more powerful and adoption increases. In particular, focus needs to be paid to ensuring that managers of financial firms are able to understand and manage what their AI models are doing as they evolve autonomously beneath their feet; and (ii) the industry needs to be alive to the possible need for macroprudential interventions to support the stability of the financial system as a whole. Regulatory perimeters need to remain under review, should the financial system become more dependent on shared AI technology and infrastructure systems. Mr. Breeden notes that the BoE stress testing frameworks could usefully evolve in time to assess whether AI models used "in the front line" of financial firms' businesses could interact with each other in ways that are hard to predict ex ante, for example, when used for trading, there could be sophisticated forms of manipulation or more crowded trades in normal times that exacerbate market volatility in stress. Ms. Breeden then goes on to discuss the use of AI in financial services, what makes it different to previous modelling technology and what it might mean for microprudential supervision. Ms. Breeden also states that the BoE will publish shortly the results of its periodic survey of how financial services firms in the U.K. are using AI and machine learning, conducted jointly with the U.K. Financial Conduct Authority. In early 2025, the Financial Policy Committee will publish its assessment of AI's impact on financial stability, setting out how it will monitor the evolution of potential risks.

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