Interconnectedness and Financial Stability in the Era of Artificial Intelligence

This paper explains how some AI use cases may amplify some threats to the stability of the financial system. It argues that lack of a consistent approach to AI Governance by financial regulators and limited oversight on some AI models in terms of systemic risks need to be addressed to preserve the stability of the financial system. To illustrate the problem and propose specific policy recommendations, the paper first explains how the widespread use AI in finance impacts systemic risk in the financial sector. Then, it explains why trustworthiness of AI encompasses not only the typical ethical principles about transparency, explainability, fairness, keeping a human in the loop, and accountability, but also the mitigation of systemic risks, particularly in the financial sector - where trust is key to promote a stable and well-functioning financial system. The paper concludes by showing that the notion of “AI for good” is also applicable in finance in the context of mitigating systemic risk when technology is used in Suptech applications. Finally, the paper provides some policy recommendations to address the challenges that result from the impact of AI for financial stability