Artificial Intelligence and Financial Stability: A Systemic Risk Approach

Abstract

The financial system is rapidly expanding and becoming more interconnected in the digital age. It is moving at an ever-increasing speed and growing in complexity, presenting myriad challenges. The widespread use of artificial intelligence (AI) is driving significant improvements in the efficiency of financial services. However, examining whether this progress comes at the expense of financial stability or creative destruction is crucial. The chapter delves into the conceptual challenges of using AI and identifies the transmission channels that can lead to systemic risks. A simple model is presented and tested using the example of high-frequency trading (HFT) to quantify systemic risk. The stochastic and nonlinear nature of AI risks makes the routine application of conventional risk assessment methods challenging. The focus on systemic risks underscores the urgency and importance of comprehensively understanding AI risks, particularly in the face of the financial system's complexity.