tl;dr
The Reserve Bank of India (RBI) has highlighted the financial stability risks associated with the rapid adoption of artificial intelligence (AI) in the financial sector. The central bank's December 2024 Financial Stability Report emphasizes concerns such as market concentration risk, cyber threats e...
The Reserve Bank of India (RBI) has cautioned that the growing popularity and adoption of artificial intelligence (AI) by the financial sector come with several risks despite the benefits.
In its December 2024 Financial Stability Report, the central bank highlighted the significant market concentration risk within the financial industry and key third-party providers of cloud and AI services.
“The evolution and adoption of AI poses several risks to financial stability,” RBI pointed out in the report.
“The Reserve Bank of India (RBI) has emphasized concerns such as market concentration risk, cyber threats empowered by AI, increased market speed and volatility, and potential migration of activities to non-banking financial institutions.”
Moreover, AI may encourage migration of more activities to non-banking financial institutions (NBFIs), increasing systemic opacity.
Financial institutions are also prone to increased risks in terms of bias and hallucination, misuse, over-reliance on common models, faulty predictions, data quality issues, and third-party dependence.
While rapid technological advancements and adopting new technologies bring benefits, they also pose risks to the financial system.
In December 2024, the RBI formed a committee to develop a Framework for Responsible and Ethical Enablement of AI (FREE-AI) in the financial sector, bringing together experts from various fields.
The Committee will evaluate the current adoption of AI in financial services, both globally and in India, identify potential risks, and recommend frameworks for evaluation, mitigation, and monitoring for financial institutions.
“Standard setting bodies and national regulators and supervisors should, therefore, take a balanced approach to reap the benefits of AI while safeguarding the financial system.
In order for artificial intelligence (AI) to work right within the law and thrive in the face of growing challenges, it needs to integrate an enterprise blockchain system that ensures data input quality and ownership—allowing it to keep data safe while also guaranteeing the immutability of data.