On the use of artificial intelligence in financial regulations and the impact on financial stability

38 Pages Posted: 14 Nov 2023 Last revised: 6 Feb 2024

See all articles by Jon Danielsson

Jon Danielsson

London School of Economics - Systemic Risk Centre

Andreas Uthemann

Bank of Canada; London School of Economics - Systemic Risk Centre

Date Written: February 3, 2024

Abstract

Artificial intelligence (AI) can undermine financial stability because of malicious use, misaligned AI engines and since financial crises are infrequent and unique, frustrating machine learning. Even if the authorities prefer a conservative approach to AI adoption, it will likely become widely used by stealth, taking over increasingly high-level functions, driven by significant cost efficiencies and its superior performance on specific tasks. We propose six criteria against which to judge the suitability of AI use by the private sector for financial regulation and crisis resolution and identify the primary channels through which AI can destabilise the system.

Keywords: artificial intelligence, systemic risk, financial regulations, central banks

JEL Classification: G01,G28,

Suggested Citation

Danielsson, Jon and Uthemann, Andreas, On the use of artificial intelligence in financial regulations and the impact on financial stability (February 3, 2024). Available at SSRN: https://ssrn.com/abstract=4604628 or http://dx.doi.org/10.2139/ssrn.4604628

Jon Danielsson (Contact Author)

London School of Economics - Systemic Risk Centre ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44.207.955.6056 (Phone)

HOME PAGE: http://www.riskreasearch.org

Andreas Uthemann

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

London School of Economics - Systemic Risk Centre ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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