AI amplifies systemic risk to financial sector, says India’s Reserve Bank boss

October 15, 2024 TH Author

The governor of India’s Reserve Bank, Shri Shaktikanta Das, yesterday warned that AI – and the platforms that provide it – could worsen systemic risk to the nation’s financial system.

In a keynote address [PDF] to the RBI@90 High-Level Conference, Das noted that artificial intelligence and machine learning “have opened new avenues of business and profit expansion for financial institutions.”

Banks have to ride on the advantages of AI and Big Tech and not allow the latter to ride on them

But in his next sentence, the central bank boss warned: “These technologies also pose financial stability risks.”

Das expressed concern that a small number of providers will dominate the AI market, which could lead to concentration risks.

“This could amplify systemic risks, as failures or disruptions in these systems may cascade across the entire financial sector,” he warned, adding his concerns that “growing use of AI introduces new vulnerabilities, such as increased susceptibility to cyber attacks and data breaches.”

Another concern Das expressed is that “AI’s opacity makes it difficult to audit or interpret the algorithms which drive decisions.” The central banker worries that could mean “unpredictable consequences in the markets.”

Das stopped well short of recommending the organizations he regulates ignore AI. Instead, he urged “financial institutions must put in place adequate risk mitigation measures against all these risks. In the ultimate analysis, banks have to ride on the advantages of AI and Big Tech and not allow the latter to ride on them.”

The bank boss also urged work to speed and simplify cross-border peer-to-peer payments, suggesting India’s Unified Payment Interface could play a role in doing so. He also floated the possibility that nations allow interoperability of their central bank digital currencies to improve cross-border cashflows.

Social media is also on Das’s mind – he observed that “rumors and misinformation” spread on such services have the potential to “cause liquidity stress.”

“Banks have to remain alert in the social media space and also strengthen their liquidity buffers,” he advised. ®