UK Financial Stability in Focus report: AI in the financial system

The Financial Policy Committee (FPC) of the Bank of England (BoE) has published the Financial Stability in Focus report on AI in the UK financial system. The FPC considers the potential benefits of AI with its growing development, but also the macro-prudential implications on the financial system. Specifically, the report focuses on the following four areas:

• Greater use of AI in banks' and insurers' core financial decision-making. The report highlights that while there is existing regulation to manage AI related risks and the supervisory tool of the senior managers and certification regime ensures individual accountability for conduct and competence, existing legal frameworks still need to evolve (as per previous regulator publications, summarised in the FS2/23 feedback statement), and consideration should be given to potential macro-financial vulnerabilities.
• Greater use of AI in financial markets. Increased use of AI to inform more trading and investment decisions could assist with market efficiency, but flaws from data and models can result in inaccurate interpretations which may result in insufficient financial resilience. The report also notes that advanced AI models may engage in exploitative opportunities or adverse behaviours, including market manipulation.
• Operational risks in relation to AI service providers. The report notes that financial institutions rely on a small number of service providers, which leads to potential systematic risks in the event of disruptions to them, particularly when it is not feasible to switch quickly to alternative providers. Operational resilience is an existing area of focus for the FPC.
• Changing external cyber threat environment. AI can potentially enhance financial institutions cyber defensive capabilities, but it can also increase the risk of successful cyber-attacks against the financial system and create new vulnerabilities that can be exploited.

The report also outlines various sources of information it will use to monitor and mitigate AI-related risks as well as flagging significant regulatory work in this space, including the new regulatory regime for critical third parties and the BoE's most recent systemic risk survey (published on 9 April).

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