Top federal regulators are warning for the first time that the use of artificial intelligence poses a risk to the financial system. The Financial Stability Oversight Council, a team of leading regulators across the US government, formally classified AI on Thursday as an “emerging vulnerability.” Sophisticated AI models have exploded in popularity in recent years, even as many prominent names within the field say the nascent technology could have disastrous effects if it grows out of control. “AI has the potential to spur innovation and drive efficiency, but its use in financial services requires thoughtful implementation and supervision to manage potential risks,” FSOC warned in its annual report Thursday. FSOC, created in the aftermath of the 2008 financial crisis and led by US Treasury Secretary Janet Yellen, cautioned that AI can “introduce certain risks,” including cybersecurity concerns, compliance risks and privacy issues. Regulators also expressed concern about “complicating factors” related to generative AI models like ChatGPT. For example, the council flagged data security, consumer protection and privacy risks posed by financial firms using generative AI. And they flagged that generative AI models can produce flawed results known as “hallucinations.”Another worry for regulators is that some AI models operate as “black boxes” – meaning their inner workings are impenetrable to outsiders. FSOC said this “lack of ‘explainability’ can make it difficult to assess the system’s conceptual soundness, increasing uncertainty about their suitability and reliability.”

Full report : Government report for the first time identifies AI as potential risk to financial stability.