A new FSB report sets out guidelines for relevant authorities regarding how to tackle the challenges related to overseeing the adoption of artificial intelligence in the financial services industry. AI is being increasingly used by financial services providers and other industries as well because of its potential to streamline operations and boost efficiency.
The latest report from the Financial Stability Board identifies a range of direct and proxy indicators that could support monitoring of ongoing AI adoption and related vulnerabilities in the financial sector.
The extensive report from the FSB features a case study on various developments in the AI supply chain as well as its potential implications on FIs’ reliance on a just a few critical third-party providers.
These reportedly include vulnerabilities such as those pertaining to criticality, concentration, as well as substitutability.
The Financial Stability Board report further builds on and aims to complement the FSB’s previous report on the Financial Stability Implications of Artificial Intelligence.
Although authorities appear to have made some progress in understanding AI use cases and their advantages and drawbacks, monitoring activities are currently at an early stage.
The FSB report pinpoints challenges being faced by various authorities, such as data gaps as well as the absence of standardised taxonomies. The update identifies various indicators to support overseeing ongoing AI adoption and related vulnerabilities in the financial ecosystem.
Third-party service providers serve a vital role in assisting financial institutions with introducing AI applications in an efficient manner. But these relationships expose FIs to operational vulnerabilities. There is also the increasing usage of generative AI that may lead to major third-party dependencies.
The report acknowledges the dependence of generative AI on a small number of suppliers like specialised hardware, cloud infrastructure, and pre-trained models.
This dependence may result in critical vulnerabilities in case there are only a few viable alternatives available.
A case study on GenAI examines such challenges, leveraging FSB’s third-party risk management toolkit and suggesting indicators to determine criticality, concentration, substitutability, as well as the systemic relevance of third-party AI solution.
The FSB now wants to encourage authorities to improve their monitoring approaches, by using the indicators shared in the report. In order to support such efforts, the FSB is to facilitate alignment in taxonomies and indicators via cross-border cooperation.
The FSB is tasked with coordinating at the global level the work of national financial authorities and standard-setting entities and promotes the implementation of regulatory, supervisory, and other financial industry guidelines that are said to be in the interest of ensuring financial stability.
It currently aims to bring together various authorities responsible for financial stability in 24 different countries and jurisdictions, global FIs, industry-specific international groupings of regulators and supervisors, as well as committees of central bank professionals.
The FSB is currently being chaired by Andrew Bailey, Governor of the Bank of England.
The FSB Secretariat is based in Basel, Switzerland. It is hosted by the Bank for International Settlements.