How AI Could Impact Finance

By: Keith Wagstaff · June 12, 2024 · Reading Time: 3 minutes

It’s all about AI at the moment. “When used appropriately,” AI can “improve efficiency, accuracy, and access to financial products,” said Treasury Secretary Janet Yellen last week at a conference on AI and financial stability .

But she also said the new technology poses “significant risks” to the financial system. So what is the future of AI and finance?

AI Potential

AI has already been used by banks to spot fraud and illegal activity, said Yellen. It’s also been useful for customer service and forecasting.

But that’s just the tip of the iceberg. A report from consulting firm Deloitte said AI might be used to help companies improve their data management, reporting, or risk management. It could also greatly reduce repetitive tasks now done manually in spreadsheets. Another way to say “efficiency gains” is “money saving.”

The McKinsey Global Institute estimated that generative AI might add $200 billion to $340 billion in value to the global banking sector annually. That would be huge for businesses, investors, and the stock market as a whole. But the technology also comes with risks.

Risks Along the Way

AI models are incredibly complex and make their decisions in a “black box,” which means we don’t really know why they do what they do. This is not an industry secret. In May, OpenAI CEO Sam Altman publicly said he doesn’t fully understand how the company’s main product, ChatGPT, works.

The financial services industry is highly regulated, and institutions such as the SEC could require some level of transparency. Technology that even its creators and users don’t fully comprehend doesn’t lend itself to effective oversight. Or, as Yellen put it, “vulnerabilities may arise from the complexity and opacity of AI models.”

There is also a worry about what may happen when everyone relies on the same data and the same models. In other words, if every Wall Street firm is using a few AI models, for example ChatGPT, Gemini from Google (GOOGL), Meta’s (META) Llama, or Anthropic’s Claude, could this result in a herd mentality?

Because “AI has been shown to perform poorly when faced with novel events,” said the International Monetary Fund’s first deputy managing director, Gita Gopinath, last month , when something unprecedented happens, models might become overly conservative leading to “a self-confirming spiral of fire-sales and collapsing asset prices.”

This doesn’t mean AI has no place in the industry. But it means that it’s a little tricky. Yellen said the U.S. Treasury Department would “seek comments from financial institutions, consumers, advocates, academics, and other stakeholders on the current uses, opportunities, and risks of AI in the financial services sector,” and “continue its efforts to monitor AI’s impact on financial stability.”

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