Artificial Intelligence AI usage increases rapidly, leading to potential hazards in the United States financial system unless properly overseen, as cautioned by a team of regulators on a Thursday report. The Financial Stability Oversight Council, made up of leading financial regulators and presided by Treasury Secretary Janet Yellen, pointed out the threats of AI in the yearly fiscal stability report, for the first time ever.

Although the council recognized AI's potential in fostering innovation or improving efficiencies in financial firms like banks, they stressed the importance of the companies and their regulators to keep a careful eye on the fast-advancing technology.

AI introduces specific threats including safety and robustness risks like cyber and model threats, as mentioned by the council in their yearly report released on a Thursday, stressing the importance for firms and their regulators to build expertise and capacity in keeping track of AI innovations and applications and to distinguish developing risks.

The panel also highlighted the growing responsibilities of non-banks and private credit, deserving close monitoring, and indicated that financial establishments and overseers should continuously aspire to better understand the hazards originating from climate change.

AI applications can pose a challenge due to their technical complexity and lack of transparency, making it difficult for institutions to explain or keep an eye out for potential shortcomings. Insufficient understanding of AI tools by companies and supervisors could lead to overlooking inaccuracies or bias, the report highlighted.

In addition to that, the report stated that AI tools are also heavily reliant on large external datasets and third-party vendors, which could potentially introduce privacy and cybersecurity threats of their own. Some regulators, like the Securities and Exchange Commission who also sits on the council, are scrutinizing firms AI use, while there was also a recent executive order issued by the White House targeted at mitigating AI-associated risks.

In the report, FSOC emphasized the American banking system's resilience despite this year's numerous big bank failures. Yet, regulators were advised to monitor uninsured bank deposits closely, whose rapid withdrawal triggered the failures.