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Janet Yellen warns that AI in finance poses “significant risks”
By Matt Egan, CNN
(CNN) – Treasury Secretary Janet Yellen is expected to warn bankers and technology executives on Thursday that while artificial intelligence could open the door to big rewards for the financial system, the technology also threatens to introduce new dangers, from according to excerpts of speeches first shared with CNN.
Yellen’s speech at a financial stability conference represents his most extensive observations to date on AI.
Come as investors fight to get a piece of the AI boomtech giants embark on an AI arms race and regulators worry about What could go wrong.
“The tremendous opportunities and significant risks associated with the use of AI by financial firms have pushed this issue to the top” of financial regulators’ agendas, Yellen plans to say in prepared remarks to be presented at the conference, which takes place on Thursday. at the U.S. Treasury Department and on Friday at the Brookings Institution. The event, including Yellen’s comments, will be broadcast live.
On the opportunities side, Yellen will note how AI has already been used by investors to support forecasting and portfolio management and by banks to combat fraud and support customer service, according to prepared remarks.
In the future, Yellen is expected to say that the “rapid evolution” of AI could pave the way for making financial services cheaper and easier to access, specifically pointing to advances in natural language processing, image recognition and generative AI.
AI chatbots, including OpenAI’s ChatGPT and Google’s Gemini, have captivated users with their abilities. The latest AI tools can conjure up images almost instantly, spit out song lyrics, and some can even generate film-quality videos.
Yellen herself has experimented with AI chatbots, a Treasury official told CNN.
“I know all of you here also recognize that the use of AI by financial institutions brings risks along with these opportunities,” Yellen said in prepared remarks.
A Treasury official told CNN the conference is expected to include a mix of regulators, technology executives, asset managers, insurers, academics, civil society organizations and small and large banks.
Last December, a team of top US regulators led by Yellen warned for the first time that AI poses a risk to the financial system. The Financial Stability Oversight Board, a SWAT team of regulators formed after the 2008 financial crisis, has formally designated AI as an “emerging vulnerability.”
In her speech, Yellen plans to explain what could go wrong in the financial markets.
For example, Yellen will note that the “complexity and opacity” of AI models can cause problems.
The problem is that many AI models function as a “black box”, meaning that their inner workings are impenetrable to outsiders.
If Wall Street firms rely on arcane AI models, regulators will have a hard time understanding how secure their systems really are.
Yellen also plans to cite “inadequate risk management frameworks” around AI risks and “interconnections that emerge as many market participants rely on the same data and models.”
In other words, if too many investors rely on tools that produce the same result, this could cause overcrowded market positions that exacerbate market movements, both up and down.
Likewise, Yellen will say that there is a “concentration” risk linked to the fact that there are only a few companies that provide AI models. This means that if one of them goes down, many Wall Street companies could be affected.
Another concern: AI models can sometimes produce biased results. And that can be a big problem in the real world, especially when it comes to making financial decisions like who gets a loan.
“Insufficient or flawed data can also perpetuate or introduce new biases in financial decision-making,” Yellen will say, according to prepared remarks.
A major challenge facing AI that Yellen does not address in excerpts from her speech: so-called hallucinations. AI models have a history of making things up, often convincingly.
Such hallucinations have already caused problems for lawyers when they cited case law that did not exist.
Yellen is expected to emphasize that regulators plan to continue monitoring the impact of AI on financial stability.
Given how quickly AI is evolving, Yellen will say that regulators and industry can use scenario analysis to better understand “future vulnerabilities” and what can be done to “increase resilience.”
A Treasury official told CNN that the FSOC is working to connect the dots on how AI could pose a threat to the financial system, including increasing efforts to monitor how it is already being used.
It’s clear that US employees themselves are relying on AI to do their jobs.
For example, the IRS announced last September that it began deploying AI to detect tax fraud.
And in February, the Treasury Department revealed that discreetly deployed AI to catch crooks trying to steal from taxpayers.
Treasury plans to do even more with AI in the future.
“We are engaged with the public and private sectors in using AI to detect some of the biggest risks we face, from money laundering to terrorist financing to sanctions evasion,” Yellen plans to say.
O-CNN-Wire
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