Regulators Warn of AI Crisis: Financial Stability at Risk
In a shocking revelation, the chair of the US Securities and Exchange Commission (SEC), Gary Gensler, has warned that the concentration of power in artificial intelligence (AI) platforms could lead to a financial crisis within the next decade. Gensler has urged regulators to take swift action to manage the risks posed by AI to financial stability.
The challenge lies in the fact that AI risks cut across financial markets and are created by tech companies that fall outside the scope of Wall Street watchdogs. Gensler acknowledged that shaping AI regulation would be a tough test for US regulators due to the horizontal nature of the issue. Many institutions may be relying on the same base model or underlying data aggregator, which is a cross-regulatory challenge.
Currently, the SEC’s proposed rule focuses on individual models deployed by broker dealers and investment advisers, but Gensler argues that this doesn’t address the horizontal issue. He expressed concerns about the potential herd behavior resulting from parties basing decisions on the same data model, which could undermine financial stability and trigger the next crisis.
While the EU has drafted tough measures to police AI, the US is still reviewing the technology to determine which aspects require new regulation. Gensler believes that AI’s “economics of networks” make a financial crisis nearly unavoidable. Wall Street has already embraced AI in various ways, but Gensler is concerned about the concentration of market makers and potential competition issues.
In addition to the AI crisis, Gensler is finalizing a rule that requires public companies to disclose their emissions. However, he has declined to comment on whether scope 3 disclosures, which include emissions from third-party purchases, will be included in the final version. The SEC’s climate proposal has faced backlash from Republicans and attorneys-general, but Gensler remains committed to doing what is right within the law.
With the potential AI crisis looming and the SEC’s active rulemaking agenda facing legal challenges, it is clear that swift action is needed to manage the risks AI poses to financial stability. How do you think regulators should address these challenges? Comment below and let us know your thoughts.
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