BoE speech: balancing the opportunities and risks of AI

Randall Kroszner, BoE external member of the Financial Policy Committee, has delivered a speech on balancing the productivity opportunities of financial technology and AI against the potential risks.

Speaking at the CityWeek 2024 Summit, key highlights of the speech included:

  • the UK should embrace innovation opportunities and subsequent productivity growth;
  • financial stability must also be ensured, which the disruptive innovation of AI presents challenges towards;
  • FSMA 2023 introduced a secondary objective for BoE to facilitate innovation and gives them a clear aim to ensure firms are evolving technologically but remain resilient;
  • it is much more difficult for regulators to determine the best course of action to maintain resilience when innovation is disruptive, and what the unintended consequences of any actions would be for growth and innovation:
    • regulators should therefore be open to new approaches that could help develop frameworks for policy responses;
    • this includes initiatives for safe innovation such as the Digital Securities Sandbox;
    • for fundamentally disruptive changes that scale too rapidly for sandboxes to be utilised, technologies could be trained to respect a ‘constitution’ or regulatory framework to reduce harmful consequences;
  • operational resilience can provide a route for regulators to set the foundations for the challenges of disruptive innovation:
    • new technologies can heighten malicious threats, such as AI and quantum being used to enhance cyber-attacks;
    • increasing reliance on common technologies can mean firms respond in the same way during an incident, potentially amplifying its impact;
    • when firms in the sector rely on a small number of providers, disruption in these can have a highly out sized, systemic impact;
    • accordingly, regulators should ensure models do not all operate in the same way to protect against herding and the threat this poses to financial stability;
  • the FCA sees the challenge as developing a regulatory framework that supports innovation but which also considers and mitigates the potential risks to financial stability.

Harry Wells