Interconnectedness and financial stability in the era of artificial intelligence

Author

Nydia REMOLINA LEON, Singapore Management UniversityFollow

Publication Type

Book Chapter

Version

publishedVersion

Publication Date

4-2023

Abstract

This chapter explains AI use cases may amplify some threats to the stability of the financial system. It argues that lack of a consistent approach to AI Governance by financial regulators and limited oversight on some AI models in terms of systemic risks need to be addressed to preserve the stability of the financial system. To illustrate the problem and propose specific policy recommendations, the chapter first explains how the widespread use AI in finance impacts systemic risk in the financial sector. Then, it explains why trustworthiness of AI encompasses not only the typical ethical principles about transparency, explainability, fairness, keeping a human in the loop, and accountability, but also the mitigation of systemic risks, particularly in the financial sector - where trust is key to promote a stable and well-functioning financial system. The chapter concludes by showing that the notion of “AI for good” is also applicable in finance in the context of mitigating systemic risk when technology is used in SupTech applications. Finally, the chapter provides some policy recommendations to address the challenges that result from the impact of AI for financial stability.

Keywords

Systemic risk, Financial stability, AI governance, AI auditing, SupTech, AI in finance

Discipline

Artificial Intelligence and Robotics | Banking and Finance Law | Science and Technology Law

Research Areas

Innovation, Technology and the Law; Corporate, Finance and Securities Law

Publication

Artificial Intelligence in Finance: Challenges, Opportunities and Regulatory Developments

Editor

REMOLINA, Nydia; GURREA-MARTINEZ, Aurelio

First Page

350

Last Page

367

Identifier

10.4337/9781803926179.00026

Publisher

Edward Elgar Publishing

Citation

REMOLINA LEON, Nydia. Interconnectedness and financial stability in the era of artificial intelligence. (2023). Artificial Intelligence in Finance: Challenges, Opportunities and Regulatory Developments. 350-367.
Available at: https://ink.library.smu.edu.sg/sol_research/4619

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Additional URL

https://doi.org/10.4337/9781803926179.00026