Could AI’s unchecked growth spur financial disaster?


The SEC head has cautioned a financial upheaval instigated by AI is “almost inescapable” within the upcoming decade if the technology isn’t controlled properly.

According to The Hill, Gary Gensler described the challenge to the Financial Times as considerably formidable. He mentioned that the crux of the matter lies in how most existing regulations focus on individual entities, whether they’re banks, money market funds or brokers. However, the AI issue is cross-cutting, affecting various institutions that could potentially lean on identical base models or data sources.

Gensler anticipates that a financial crisis may manifest in the late 2020s or early 2030s. His concerns stem from the belief that multiple institutions relying on the same predictive models might encourage a groupthink approach, which could jeopardise stability. “I genuinely believe we’ll confront a financial crisis in the future… and post-analysis, individuals will pinpoint either a single data aggregator or a model that was overly depended upon,” he remarked.

Under Gensler’s guidance, the SEC initiated steps in July to curb the AI adoption by broker-dealers and investment advisers. A newly proposed rule, although met with resistance from certain Republican lawmakers and industry factions, seeks to prohibit firms from utilising predictive data analytics and comparable technologies, including AI, in manners that prioritise their gains over investors’.

SEC Chairman Gary Gensler said, “It’s frankly a hard challenge. It’s a hard financial stability issue to address because most of our regulation is about individual institutions, individual banks, individual money market funds, individual brokers; it’s just in the nature of what we do.”

Gensler added, “I do think we will in the future have a financial crisis and in the after action reports people will say ‘Aha! There was either one data aggregator or one model we’ve relied on.’”

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