AI Adoption in Financial Services Raises Stability Risks: RBI Governor

ENA Sectors 2024-10-15 15:53:17 Mumbai, Oct 15 (KNN) The rapid integration of artificial intelligence (AI) and machine learning (ML) in financial services is transforming the global financial landscape but also heightens systemic risks, Reserve Bank of India (RBI) Governor Shaktikanta Das warned on Monday. Speaking at the conference on Central Banking at Crossroads, Das emphasised the need for robust risk mitigation practices to ensure financial stability. Das highlighted that concentration risks could arise as a handful of technology providers dominate AI infrastructure across the financial ecosystem. Failures or disruptions in such systems could have cascading effects, amplifying risks across the entire sector, he said. This trend introduces fresh vulnerabilities, including cyberattacks, data breaches, and the challenges of opaque algorithms that are difficult to audit. AIs opacity makes it difficult to interpret the algorithms driving financial decisions, potentially leading to unpredictable market outcomes, he cautioned. Das also underscored the dangers posed by social medias influence on banking, where misinformation can spread quickly and cause liquidity stress. Banks must strengthen their liquidity buffers and remain vigilant in the social media space, he advised. The growing private credit market, largely unregulated and not fully stress-tested during downturns, poses new risks to financial stability. Das stressed the need for heightened monitoring as these markets expand rapidly. On the international front, the RBI chief revealed that India, along with other economies, is exploring linking fast payment systems through bilateral and multilateral agreements to facilitate real-time cross-border transactions in currencies such as the US dollar, euro, and pound. He added that remittances—a key economic driver for developing nations—offer an opportunity to reduce transaction costs and enhance speed through innovative payment solutions. The potential of Central Bank Digital Currencies (CBDCs) was also highlighted, with Das noting their ability to support efficient cross-border payments. However, for CBDCs to succeed, harmonisation of standards and interoperability across nations will be essential. Das reiterated the importance of addressing the risks associated with cryptocurrencies, which currently lack regulatory safeguards for financial stability. The digital transformation has undoubtedly boosted efficiency but presents new challenges for central banks. Proactive measures will be essential to safeguard financial stability in this evolving landscape, Das concluded. This cautionary note comes as the banking sector grapples with RBIs new liquidity coverage ratio (LCR) norms, which are likely to curtail lending to non-banking financial companies (NBFCs). (KNN Bureau) 39599 https://knnindia.co.in/news/newsdetails/sectors/ai-adoption-in-financial-services-raises-stability-risks-rbi-governor 2024-10-15 15:53:17 knnindia.co.in AI Adoption in Financial Services Raises Stability Risks: RBI Governor