On the use of artificial intelligence in financial regulations and the impact on financial stability

Paper: arXiv 2310.11293

Authors: Jon Danielsson, Andreas Uthemann

Abstract

Artificial intelligence (AI) can undermine financial stability because of malicious use, misinformation, misalignment, and the AI analytics market structure. The low frequency and uniqueness of financial crises, coupled with mutable and unclear objectives, frustrate machine learning. Even if the authorities prefer a conservative approach to AI adoption, it will likely become widely used by stealth, taking over increasingly high-level functions driven by significant cost efficiencies and superior performance. We propose six criteria for judging the suitability of AI.

Complexity vs Empirical Score

• Math Complexity: 1.5/10
• Empirical Rigor: 2.0/10
• Quadrant: Philosophers — conceptual discussion, limited math and data

Why this score: The paper provides a qualitative, policy-oriented framework assessing systemic risks and suitability criteria for AI in financial regulation. While clear and conceptually novel regarding AI governance challenges, it lacks formal mathematical modeling, quantitative backtesting, or empirical data analysis.

Research Flowchart

  flowchart TD
    A[Goal: Assess AI Impact on Financial Stability & Suitability] --> B[Inputs: Financial Crisis Data, Objectives & Market Structures]
    B --> C[Evaluate Machine Learning Limitations in Rare Crisis Events]
    C --> D[Analyze Threats: Malicious Use, Misalignment & Stealth Adoption]
    D --> E[Formulate 6 Criteria for AI Suitability in Regulation]
    E --> F[Outcomes: AI Risks Financial Stability & Requires Criteria Framework]