ECB’s de Cos: Artificial Intelligence Could Amplify Banking Crises if Unregulated

17 April 2024

By David Barwick – WASHINGTON (Econostream) – The growing use of AI and large language models (ML) in banking could worsen sector crises if the associated challenges are not addressed, European Central Bank Governing Council member Pablo Hernández de Cos said Wednesday.

At the IIF Global Outlook Forum, de Cos, who heads Banco de España but was speaking in his capacity as Chair of the Basel Committee on Banking Supervision, said that the application of AI by banks ‘raises important prudential and financial stability challenges’, and it could be ‘some time’ before the effects of AI throughout a financial cycle are apparent.

‘Left unchecked, such models could potentially amplify future banking crises’, he said. ‘But these challenges and limitations are not insurmountable, provided that central banks and supervisory authorities adjust to this new reality and collaborate effectively.’

Banks had to foresee the risks linked to AI and ML, making these an integral part of risk management and governance, he urged.

‘Central banks and supervisory authorities must also anticipate and mitigate the potential risks and vulnerabilities to the banking system’, he said.

The Basel Committee intends to issue a report focusing on digitalisation in finance and what that means for regulation and supervision, he said.