This semi-monthly column highlights news, government documents, NGO/IGO papers, industry white papers and reports, academic papers and speeches, and central bank actions on the subject of AI’s fast paced impact on the banking and finance sectors. The chronological links provided are to the primary sources, and as available, indicate links to alternate free versions.
NEWS:
Wall Street to Big Tech: Show us the AI money. Microsoft, Meta, Amazon, Apple, and others are facing investor backlash despite strong profits as they warn of soaring artificial intelligence costs Quartz, October 31, 2024.
Bank of England weighs in on AI governance. Dechert LLP, October 29, 2024.
- The Bank of England considers the latest wave of AI developments to be a “step change” for financial modelling that brings substantial opportunities as well as risks.
- AI governance is a developing field and financial institutions can learn from the Bank of England’s experimental and considered approach to AI governance, which is underpinned by data governance and human accountability.
- The Bank of England’s newly launched AI Consortium fosters public-private collaboration to explore AI’s role in UK financial services, focusing on applications, benefits, risks and safe adoption strategies. Applications to join the consortium are open until 8 November 2024.
Survey: Nearly Half of Americans Think AI Can Give Better Investing Advice Than Human Stock Brokers, Newsweek, October 28, 2024. Since ChatGPT was released to the public in November 2022, AI has taken the tech world by storm. But what about the world of investing? AI in investing refers to the use of artificial intelligence, machine learning and large language models (LLMs) for financial purposes. This includes everything from asking chatbots for investment advice and using robo-advisors for wealth management to algorithmic trading and predictive analytics. To find out how people are (or aren’t) using AI to help with their finances, we asked over 1,000 Americans whether they’ve used AI to invest, how they think it compares to human stock brokers and what would make them less skeptical of the technology.
SEC to intensify scrutiny of AI tools – The Securities and Exchange Commission is set to increase oversight of AI usage by financial firms, aiming to ensure compliance with regulations. The agency’s focus includes examining how AI tools are used in trading and fraud prevention. Bloomberg, October 21, 2024. SEC to intensify scrutiny of AI tools – The Securities and Exchange Commission is set to increase oversight of AI usage by financial firms, aiming to ensure compliance with regulations. The agency’s focus includes examining how AI tools are used in trading and fraud prevention. Bloomberg, October 21, 2024. The US Securities and Exchange Commission’s examiners will step up scrutiny of financial firms’ use of artificial intelligence next year, the latest sign of regulators’ growing concerns about the emerging technologies. Investment advisers, brokers, clearing agencies and others can expect the SEC to focus on their statements about AI tools to ensure they comply with agency rules, according to a Division of Examinations report published Monday. The regulator will also look into how firms supervise the use of the technologies for tasks tied to trading, fraud prevention and anti-money-laundering policies. Although the agency put AI risks on its examination watch list last year, it went into further detail in the latest report. The sharper focus follows warnings from a number of financial regulators, including the Federal Reserve and Consumer Financial Protection Bureau, that the new tools present serious risks as well as opportunities. They have sounded alarms about everything from discrimination to potential systemic risk. The SEC has clamped down on so-called AI washing, or misrepresenting how companies use machine learning and other tools. Chair Gary Gensler has repeatedly warned against overblown claims about AI. In March, the regulator fined two money managers for making allegedly bogus claims about their use of artificial intelligence. Last week, the agency sued a robotics company and its founder for allegedly making fake statements about an AI-powered humanoid robot. The SEC watch list reflects rapid developments in AI’s underlying technologies, said Peter Dugas, executive director of Capco, a financial-services consulting firm. Investors and corporate board members want firms to push out automation tools to speed up processes, but the firms need to ensure they’re complying with agency rules and disclosing risks to customers, he said. “It’s a broad industry challenge everyone is facing,” Dugas said. “The SEC is very much watching.
The Bank of England is establishing an Artificial Intelligence Consortium. Its purpose is to provide a platform for public-private engagement to gather input from stakeholders on the capabilities, development, deployment and use of AI in UK financial services. Its specific aims are:
- to identify how AI is or could be used in financial services, for example, by considering new capabilities, deployments and use cases as well as technical developments where relevant
- to discuss the benefits, risks and challenges arising from the use of AI. Such benefits, risks and challenges may be with respect to financial services firms or with respect to the wider financial system
- to inform the Bank of England’s approach to addressing risks and challenges, and promoting the safe adoption of AI.
- Terms of reference
Applications for the AI Consortium are open. Further details can be found on the Consortium’s call for interest.
Corporate Compliance Insights, October 26, 2024. Swift to Launch AI Fraud Detection for Global Banking in 2025. Global payments network Swift will launch an artificial intelligence-powered fraud detection service in January 2025 to help banks combat financial crime, upgrading its existing security infrastructure, the banking network said in a news release. The new system will analyze pseudonymized data from billions of annual transactions on Swift’s network to flag suspicious activity in real-time, building upon Swift’s Payment Controls Service currently used by small and medium-sized financial institutions. The rollout follows successful pilots with banks across Europe, North America, Asia and the Middle East, and it comes as industry estimates put financial services fraud losses at $485 billion in 2023. “Bad actors are using increasingly sophisticated tactics to commit financial crime, and the global financial industry needs to raise its defenses higher to ensure their customers can continue to transact globally with confidence,” said Jerome Piens, Swift’s chief product officer.
SPEECHES:
PAPERS:
AI and Finance, – Working Paper 33076. DOI 10.3386/w33076. Issue Date We provide evidence that the development and adoption of Generative AI is driving a significant technological shift for firms and for financial research. We review the literature on the impact of ChatGPT on firm value and provide directions for future research investigating the impact of this major technology shock. Finally, we review and describe innovations in research methods linked to improvements in AI tools, along with their applications. We offer a practical introduction to available tools and advice for researchers interested in using these tools.
GOVERNMENT DOCUMENTS:
U.S. Securities and Exchange Commission. Fiscal Year 2025 Examination Priorities Division of Examination. Over the last three decades, technology has globally shifted the securities industry and how most people invest. In the early years of the examination program, the internet was just becoming mainstream. Today, some registered firms are developing generative artificial intelligence based applications and employing complex algorithms to inform investment strategies. Securities trades clear faster and many people can invest in our capital markets using just a smartphone. As technology continues to transform investing, we must work to identify new and emerging risks. The Division must constantly scan the horizon for these risks and stand ready to examine registered firms for compliance with SEC rules tied to these risks, and not merely react to these threats. To ensure investors remain protected, we continue to invest in training and work hard to keep our staff abreast of changes in the industry. We also continue to assess how these changes might impact registered firms’ operations and regulatory compliance, and at the same time, remain nimble to retool our approaches in conducting examinations.
The Bank of England is establishing an Artificial Intelligence Consortium. Its purpose is to provide a platform for public-private engagement to gather input from stakeholders on the capabilities, development, deployment and use of AI in UK financial services. Its specific aims are:
- to identify how AI is or could be used in financial services, for example, by considering new capabilities, deployments and use cases as well as technical developments where relevant
- to discuss the benefits, risks and challenges arising from the use of AI. Such benefits, risks and challenges may be with respect to financial services firms or with respect to the wider financial system
- to inform the Bank of England’s approach to addressing risks and challenges, and promoting the safe adoption of AI.
- Terms of reference
Applications for the AI Consortium are open. Further details can be found on the Consortium’s call for interest.
Board of Governors of the Federal Reserve System Compliance Plan for OMB Memorandum M-24-10. Overview In accordance with the Office of Management and Budget’s (OMB) Memorandum M-24-10, Advancing Governance, Innovation, and Risk Management for Agency Use of Artificial Intelligence, the Board of Governors of the Federal Reserve System (Board) is pleased to share its plan for compliance with the requirements of M-24-10. The Board is committed to an artificial intelligence (AI) program for its staff that fosters responsible AI innovation, maintains robust AI governance, and manages the risks associated with the use of AI. As part of the Board’s enterprise technology and data governance frameworks, the Chief Artificial Intelligence Officer (CAIO) plays an important role in advancing the Board’s AI objectives and coordinating the Board’s use of AI. The Board anticipates continued growth in AI capabilities as its AI program matures. This document outlines the Board’s compliance plans in satisfaction of the requirements of section 3(a)(iii) of M-24-10 and section 104(c) of the AI in Government Act. The Board will report its individual use-case-specific practices in accordance with sections 5(c)(iv) and (v) of M-24-10 separately through the annual AI use case inventory.
NGO/IGO:
IMF. Central Bank Digital Currencies and Financial Stability: Balance Sheet Analysis and Policy Choices. By Romain Bouis, Gaston Gelos, Fumitaka Nakamura, Paavo A Miettinen, Erlend Nier, Gabriel Soderberg. October 11, 2024. This paper offers a comprehensive analysis of the implications for financial stability of a central bank issuing a digital currency to the public at large. We start with a systematic analysis of balance sheet changes that arise from the new liability for the central bank and the banking system, and examine how they depend on preconditions, central bank choices, and banking system responses. Based on this, we discuss the range of implications for financial stability that may arise in steady state, in the context of adoption, and in crisis times. Threats to financial intermediation in steady state arise mainly in situations where the central bank balance sheet expands, and triggers adjustment mechanisms that lead to more costly or less stable funding of the banking system, while in crisis times run risk may increase. Our analysis of policy choices to control these effects considers macroprudential policy, and an expansion of central bank lending to commercial banks, but finds that a main contribution needs to come from a design of the CBDC that encourages its use as a means of payment rather than a store of value.