Key takeaways:
- European central banks warn that the pace of artificial intelligence development is much faster than the legislative process, which increases the risk to financial stability.
- There is concern that algorithms and AI agents may increase market volatility, especially in times of crisis.
- Growing enthusiasm for AI and increased financing may lead to the overvaluation of assets, and a possible decline in their prices may have serious economic consequences.
AI is a threat, say central banks
The deputy governor of the Bank of England, Sarah Breeden, has warned that AI agents could increase volatility during periods of market stress. “She also questioned the need for safeguard mechanisms, analogous to circuit breakers or emergency switches, that would limit or block trading across the entire market if faulty AI models caused it to collapse,” she said Tuesday at the European Central Bank’s annual meeting in Sintra, Portugal.
We’ve been talking about cybersecurity threats, hacking, data theft, etc. for about a decade. But as AI models accelerate and deepen, we face a much bigger risk because it’s happening very, very quickly, and the means to defend ourselves – and the funding needed to defend them – have yet to be found
– she said.
Nikhil Rathi, chief executive of the UK’s Financial Conduct Authority (FCA), told CNBC’s Squawk Box on Thursday that traditional regulatory cycles do not work in the era of rapid AI development:
Technology is moving incredibly fast, and we need to think differently about some of the innovations we’re seeing in the field of artificial intelligence. The reality is that some of these technologies are implemented over weeks or months, and the traditional rulemaking cycle simply doesn’t work that way. So we need to think about new tools and a different way of engaging with the market in a more collaborative way.
Impact on investments
The Bank for International Settlements warned on June 28 that “enthusiasm” about artificial intelligence could have serious financial consequences. He also pointed out the impact of monetary policy on all this. If central banks tighten policy to curb inflation, it could trigger “a sharp decline in (AI) asset prices after a prolonged period of excessive risk-taking,” which could trigger “destructive macroeconomic feedback loops.”
Breeden, quoted earlier, also stated that debt financing is growing rapidly.
We therefore considered that the financial stability consequences of any decline in the prices of AI-related assets could increase significantly
– she said.
