FSB flags systemic risks as AI’s use grows in finance

FSB lists potential risks including reliance on third-party services, cybersecurity threats, and data or model issues

The use of artificial intelligence (AI) in finance is growing and diversifying, but this expansion brings potential systemic risks including reliance on third-party services, cybersecurity threats, and data or model issues, the Financial Stability Board (FSB) said in its annual report ahead of this week’s meetings of the Group of 20 (G20) nations.

These risks could impact the stability of the financial system, the FSB report cautioned, adding that while existing rules cover many of these concerns, additional policies might be needed to fully manage them.

The Financial Stability Board (FSB), established by the G20 to monitor and recommend measures to ensure the stability of the global financial system, brings together national authorities, central banks, and global organizations to assess and address systemic risks.

The Basel, Switzerland-based body develops regulatory, supervisory, and financial sector policies to enhance resilience and prevent future crises, aiming to maintain a stable and robust global financial architecture.

The global body also outlined steps by regulators worldwide to rein in leverage at non-bank intermediaries next year.

The non-bank financial intermediation (NBFI) sector, which includes hedge funds, insurance firms, private capital markets and others, has grown to almost half of global financial assets and become more diverse, FSB said.

“Private credit is growing rapidly and there is increasing evidence of its connections with the banking system and with institutional investors. Private credit funds are exposed to credit risk, leverage and liquidity vulnerabilities, but their opacity makes it difficult to assess them,” it cautioned.

“As a result, the importance of NBFI for the financing of the real economy has increased. However, the experience of the global financial crisis in 2008, the March 2020 turmoil, and more recent episodes of market stress demonstrated that NBFI can create or amplify systemic risk and underscored the need for policy measures to enhance the sector’s resilience,” it said.

“By early 2025, the FSB will publish a consultation report with proposed policy recommendations for authorities to monitor vulnerabilities and use policy measures to address systemic risk from NBFI leverage,” it said.

In a separate letter addressed to G20 leaders, FSB chair Klaas Knot said the global body is coordinating work to address the financial stability implications from digitalization and climate change.

“Episodes of market turmoil and the failure of several banks and non-banks in recent years are a stark reminder that vulnerabilities remain within the global financial system. And as the financial system evolves, new risks are emerging. It is imperative for policy makers to keep up,” Knot said.

Policy reforms engineered by the FSB since its inception have made the global financial system more resilient. While significant progress has been made, there is more work ahead as the financial system continues to evolve, he said.

“But, as we develop new policy measures, it is essential that the existing reforms are fully implemented. There is no room for complacency in this regard, because adverse shocks could act on any unaddressed vulnerabilities,” Knot added.

The FSB’s annual report provides an overview of its work in addressing lessons from the March 2023 banking turmoil; enhancing the resilience of NBFI; addressing financial risks from climate change; improving cross-border payments; responding to technological innovation; and enhancing the resolvability of central counterparties.

It also looks at progress in implementing G20 reforms and outlines work to be undertaken in 2025.

Sign up to our daily newsletter for more updates!