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US treasury Secretary warns of AI risks in financial sector

US Treasury Secretary Janet Yellen will warn that the use of artificial intelligence in finance could lower transaction costs, but carries “significant risks,” according to excerpts from a speech to be delivered on Thursday.

In the remarks to a Financial Stability Oversight Council and Brookings Institution AI conference, Yellen says AI-related risks have moved towards the top of the regulatory council’s agenda.

“Specific vulnerabilities may arise from the complexity and opacity of AI models, inadequate risk management frameworks to account for AI risks and interconnections that emerge as many market participants rely on the same data and models,” Yellen says in the excerpts.

She also notes that concentration among the vendors that develop AI models and that provide data and cloud services may also introduce risks that could amplify existing third-party service provider risks.

“And insufficient or faulty data could also perpetuate or introduce new biases in financial decision-making,” according to Yellen.
But the remarks to the conference on AI and financial stability show that Yellen recognizes the benefits of AI in the automation of customer support services, improved efficiency, fraud detection and combating illicit finance.

“Advances in natural language processing, image recognition, and generative AI, for example, create new opportunities to make financial services less costly and easier to access,” Yellen says in the excerpts.

She adds that the Treasury Department also is in regular communication with financial regulators on their AI-related efforts, including harnessing the technology to mitigate illicit finance risks, including money laundering, terrorist financing and sanctions evasions. The Treasury is using AI tools in the Internal Revenue Service to enhance fraud detection, she added.

FSOC, which is led by Treasury and includes the Federal Reserve and other major financial regulators, “will continue its efforts to monitor AI’s impact on financial stability, facilitate the exchange of information, and promote dialogue among financial regulators,” Yellen says.

The council will also continue to support efforts to build supervisory capacity and use scenario analysis to better understand risks and opportunities.

“Given how quickly AI technology is developing, with fast-evolving potential use cases for financial firms and market participants, scenario analysis could help regulators and firms identify potential future vulnerabilities and inform what we can do to enhance resilience,” Yellen says. Reuters

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