The Financial Stability Board (FSB) has released a report evaluating the implications of artificial intelligence (AI) on financial stability. The report urges financial authorities to improve monitoring of AI developments, assess the adequacy of financial policy frameworks, and enhance regulatory and supervisory capabilities by using AI-powered tools.

The report discusses recent advancements in AI adoption within finance and their potential impact on financial stability. While AI offers benefits such as improved operational efficiency, regulatory compliance, personalized financial products, and advanced data analytics, the report highlights several vulnerabilities that could increase systemic risk.

Key concerns include third-party dependencies and service provider concentration. The reliance on specialized hardware, cloud services, and pre-trained models has heightened potential third-party dependencies. The market for these products is highly concentrated, exposing financial institutions to operational vulnerabilities and systemic risk from disruptions affecting key service providers.

Market correlations are another concern. The widespread use of common AI models and data sources may lead to increased correlations in trading, lending, and pricing. This could amplify market stress, exacerbate liquidity crunches, and heighten asset price vulnerabilities. AI-driven market correlations could worsen with increasing automation in financial markets.

Cyber risk is also noted as a threat. Malicious actors' use of AI might raise the frequency and impact of cyber-attacks. Intense data usage and novel interactions with AI services expand opportunities for cyber-attacks.

Model risk, data quality issues, and governance challenges are also identified. Some AI methods' complexity and limited explainability complicate assessing data quality for widely used models. Understanding model outputs' quality is hindered by new inaccuracies like hallucinations.

Generative AI-related financial fraud poses additional risks. It could increase fraud opportunities for malicious actors to spread disinformation in markets. Misaligned systems not calibrated within legal or ethical boundaries can harm financial stability.

While current frameworks address many vulnerabilities associated with AI use by financial institutions, more work may be needed to ensure they are comprehensive enough. The FSB suggests considering ways to address data gaps in monitoring AI developments in finance and assessing their implications for stability.

Additionally, it advises assessing whether existing frameworks adequately address identified vulnerabilities domestically and internationally. Enhancing regulatory capabilities through international cooperation is recommended along with leveraging AI-powered tools for supervisory technologies (SupTech) and regulatory technologies (RegTech).