Bank of England Warns of AI Risks to Financial Stability

As financial firms increasingly embed artificial intelligence (AI) into their core trading and investment operations, the Bank of England’s Financial Policy Committee (FPC) is sounding the alarm on the potential risks to financial stability, as stated in Finextra News.

In its latest assessment, the FPC noted that the accelerating integration of AI, while promising for innovation and efficiency, also introduces new vulnerabilities that regulators must closely monitor.

“With market participants around the world investing billions of dollars into AI efforts,” the FPC stated, “regulators are working to balance support for innovation and managing potential risks.”

Among the key concerns raised is the possibility that flaws in data or AI models could lead to significant miscalculations in a firm’s exposure, potentially causing systemic misinterpretations across the financial sector. Moreover, the reliance on a small number of open-source tools or third-party AI vendors increases the risk of herd behavior, where many firms may adopt similar strategies—leading to amplified shocks during periods of financial stress.

The committee also emphasized the dangers of over-dependence on a limited pool of AI providers. “The reliance on a small number of vendors or a given service could also generate systemic risks in the event of disruptions to them, especially if it is not feasible to migrate rapidly to alternative providers,” the FPC warned.

A particularly troubling scenario, the report suggests, involves a failure in customer-facing AI systems. “For example, under a scenario in which customer-facing functions have become heavily reliant on vendor-provided AI models, a widespread outage of one or several key models could leave many firms unable to deliver vital services such as time-critical payments.”

The potential for AI to alter the cyber threat landscape was also highlighted. While AI may bolster defenses against cyberattacks, the same technology could be weaponized by malicious actors targeting the financial system.

“The effective monitoring of AI-related risks is essential to understand whether additional risk mitigations might be warranted in support of safe innovation, what they might be, and at what point they may become appropriate,” the FPC concluded.