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On the use of artificial intelligence in financial regulations and the impact on financial stability

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  • Jon Danielsson
  • Andreas Uthemann

Abstract

Artificial intelligence (AI) can undermine financial stability because of malicious use, misaligned AI engines and since financial crises are infrequent and unique, frustrating machine learning. Even if the authorities prefer a conservative approach to AI adoption, it will likely become widely used by stealth, taking over increasingly high-level functions, driven by significant cost efficiencies and its superior performance on specific tasks. We propose six criteria against which to judge the suitability of AI use by the private sector for financial regulation and crisis resolution and identify the primary channels through which AI can destabilise the system.

Suggested Citation

  • Jon Danielsson & Andreas Uthemann, 2023. "On the use of artificial intelligence in financial regulations and the impact on financial stability," Papers 2310.11293, arXiv.org, revised Feb 2024.
    • Handle: RePEc:arx:papers:2310.11293
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    References listed on IDEAS

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    1. Regis Barnichon & Christian Matthes & Alexander Ziegenbein, 2022. "Are the Effects of Financial Market Disruptions Big or Small?," The Review of Economics and Statistics, MIT Press, vol. 104(3), pages 557-570, May.
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    3. Daníelsson, Jón & Macrae, Robert & Uthemann, Andreas, 2022. "Artificial intelligence and systemic risk," Journal of Banking & Finance, Elsevier, vol. 140(C).
    4. Mr. Luc Laeven & Mr. Fabian Valencia, 2018. "Systemic Banking Crises Revisited," IMF Working Papers 2018/206, International Monetary Fund.
    5. Pistor, Katharina, 2013. "A legal theory of finance," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 315-330.
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