With Great Power Comes Great Responsibility: Artificial Intelligence in Banking

The logical consequence of the AI-reporting challenge is a new form of systemic risk. Jon Danielsson, et al., at the London School of Economics (LSE) recently studied the impact of AI on systemic risk and concluded that one of the impacts of the use of AI was pro-cyclicality. The report notes the link between pro-cyclicality and homogeneity in beliefs and actions--when people and/or machines all think in the same way, they are more likely to make the same errors and perpetuate the same dangerous practices. As data pools become more valuable for AI-driven businesses, market consolidation will likely shrink the number of companies that have access to them, reducing competition in the market and the diversity in decision-making AI. With one eye on the last financial crisis, financial regulators will be aware of the need to control new sources of systemic risk, but the challenge falls equally within the remit of competition regulators.