Janet Yellen Says AI Offers Opportunities But Also Significant Risks to Finance

Treasury Secretary Janet Yellen noted that artificial intelligence could help financial services in a keynote address at a conference last week on artificial intelligence and financial stability. However, she also warned of significant risks to the industry.

“As I know many of you here today recognize, AI offers tremendous opportunities for the financial system,” Yellen said. “And if we define AI broadly, the financial services sector has already been capitalizing on these opportunities. For many years, the predictive capabilities of AI have supported forecasting and portfolio management. AI’s ability to detect anomalies has contributed to efforts to combat fraud and illicit finance. Many customer support services have been automated. Across these and many other use cases, we’ve seen that AI, when used appropriately, can improve efficiency, accuracy, and access to financial products.”

She went on to note how “AI’s rapid evolution could mean additional use cases.” Those include using natural language processing, image recognition, and generative AI “to make financial services less costly and easier to access.”

But with the opportunities come risks, Yellen said. In its 2023 annual report, the Financial Stability Oversight Council “identified the broader adoption of AI in financial services as a vulnerability for the first time.”

“Specific vulnerabilities may arise from the complexity and opacity of AI models; inadequate risk management frameworks to account for AI risks; and interconnections that emerge as many market participants rely on the same data and models,” Yellen said. “Concentration among vendors developing models, providing data, and providing cloud services may also introduce risks, which could amplify existing third-party service provider risks. And insufficient or faulty data could also perpetuate or introduce new biases in financial decision making.”

She said that the Biden administration has been “focused on harnessing AI’s potential to fuel innovation while mitigating risks.”

“Treasury, the Council, and member agencies have frameworks and tools that can help mitigate risks related to the use of AI, such as model risk management guidance and third-party risk management,” Yellen said. “That said, there are also new issues to confront, and this is a rapidly evolving field. We have our work cut out for us and are pursuing a variety of initiatives to identify and address emerging risks.”

“Like Yellen, Securities and Exchange Commission Chair Gary Gensler has similarly warned of the risks that centralized AI could pose to the financial system,” reported The Hill. “At a fireside chat earlier this year, Gensler said he thinks there will likely be only a handful of large base models and data aggregators, creating a ‘monoculture’ with hundreds or thousands of financial actors relying on the same data or model.”

All this could become risks for commercial real estate, whether directly in the industry through its use of AI or indirectly if problems in financial institutions affected CRE.