The rapidly growing use of artificial intelligence (AI) promises much improved efficiency in the delivery of financial services, but only at the expense of new threats to financial stability.

While there is no single notion of what AI is, it is helpful to see it as a computer algorithm performing tasks usually done by humans. AI differs from machine learning and traditional statistics in that it not only provides quantitative analysis but also gives recommendations and makes decisions. Norvig and Russell (2021) list a number of possible definitions of AI. Among these, AI as a rational maximising agent resonates with the economic notion of utility maximising agents, and hence is particularly helpful in the analysis of AI use in the financial system.

AI is seeing widespread use in the financial system. The private sector applies AI to tasks such as risk management, asset allocation, credit decisions, fraud detection, and regulatory compliance. The financial authorities are already employing AI for low-level analysis and forecasting, and we expect them further to expand their use to the design of financial regulations, the monitoring and enforcement of regulations, identification and mitigation of financial instabilities, and advice on resolving failing institutions and crises.

While the increased use of AI will be broadly beneficial, improving the delivery of financial services and efficiency of financial regulations, AI also creates new avenues of instability. The identification of those channels motivates our work in Danielsson and Uthemann (2024), which builds on the existing work on AI safety (Weidinger et al. 2022, Bengio et al. 2023, Shevlane 2023), identifying societal risks arising from AI use, including malicious use, misinformation, and loss of human control. We augment those with sources of fragility recognised in the economic literature, such as incentive problems, incomplete contracting, and strategic complementarities.

It is the vicious interaction of the AI and economic instability channels that is the biggest concern about AI use in the financial system....

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