Emerging Risks from AI in the Financial Sector

The Reserve Bank of India (RBI) has highlighted significant emerging risks associated with the increasing use and adoption of Artificial Intelligence (AI) in the financial sector.

Key Concerns

• Cyber Risks:
  • Generative AI may raise the risk of cyber threats, such as sophisticated phishing attacks using deepfakes.
  • The widespread availability of AI services, like ChatGPT, could potentially be exploited for cyberattacks.
• Financial Stability:
  • AI evolution and adoption pose risks to financial stability due to enhanced interconnectedness and reliance on shared technology and service providers.
• Market Risks:
  • AI adoption in capital markets may lead to increased market speed and volatility, especially under stress, due to highly correlated AI trading strategies.
  • Leverage-funded trades could amplify market stress through fire sales and feedback loops.
• Market Concentration:
  • Risks of market concentration within the financial sector and with third-party service providers of cloud and AI services are high.
  • High technological penetration and concentration can lead to nonlinear risk transitions, posing systemic risks.

Regulatory Response

The RBI urges regulators to update their skills and tools, adapting frameworks to address and mitigate emerging risks from AI technologies.

AI Regulation Committee

• An eight-member panel has been established by the RBI to develop a framework for the responsible and ethical use of AI.
• The committee will analyze current AI adoption in financial services and review global regulatory and supervisory approaches.
• Recommendations will include governance aspects for the responsible, ethical adoption of AI models in the financial sector.