Generative AI in Finance: Risks and Potential Solutions

Abstract

Generative Artificial Intelligence (AI) captured the attention of academics, policymakers, the private sector and some regulators in 2022 after the launch of ChatGPT and its widespread adoption worldwide. Then, in 2023, Microsoft Chairman and Chief Executive Officer Satya Nadella said during the World Economic Forum session that the ‘golden age’ of AI is underway and generative AI plays a big role in it. Accordingly, OpenAI, the company behind the launch of ChatGPT, received multibillion dollar investments from Microsoft. Additionally, Google and Meta created their generative AI models. Given the multiplicity of potential use cases of generative AI models, not only the tech industry is interested in this development. Many industries were caught in the hype of generative AI including the financial sector. Indeed, financial institutions worldwide are deploying generative AI and are starting with internal uses. However, along with that comes potential pitfalls and challenges. This paper argues that addressing the risks and challenges of generative AI requires a context and sector-specific debate. The challenges of using AI highly depend on the context where the models are implemented and used. Namely, generating content to provide financial advice has different implications for society than generating the image of a turtle. Hence, in the current debate about AI governance, and specifically in the generative AI space, it is important to analyse the risks of generative AI in finance. This paper is a first attempt to map the ethical and legal risks of generative AI in the financial sector given than previous scholarship and most policy discussions have focused on the risks of predictive AI in the financial sector. Based on this analysis and following a functional approach, the paper also proposes an avenue to deal with the risks created by generative AI in finance.

Keywords: Generative AI, financial sector, AI governance, artificial intelligence, predictive AI, finance, AI regulation, financial regulation.