Regulators are still at an “early stage” in their efforts to track the risks posed to the financial system by the rapid adoption of artificial intelligence, global financial watchdogs warned on Friday.

In a report to the G20, the Financial Stability Board said that while many global authorities had tried to “enhance their AI-related data collection initiatives” there were still significant gaps in their understanding of how AI can contribute to the financial sector’s riskiness.

“Certain vulnerabilities, such as third-party dependencies, market correlations, cyber risks, and model governance challenges, are particularly difficult to monitor due to limited data availability, lack of transparency, and the evolving nature of AI systems,” the report noted.

Third party dependencies — where regulated financial services firms rely on unregulated technology companies for critical infrastructure — have also drawn scrutiny in other areas like cloud computing. In the report, the FSB called out generative AI as a potential area of concern since interest in it is high among financial firms who would face “significant constraints in cost and talent acquisition if they were to try and develop these models internally.”

“The choice is often between using these models or no use of GenAI at all,” the FSB wrote. “However, the continued and expanding use of GenAI may create greater third-party dependencies among FIs on the service providers for these leading GenAI models.”

Banks including The Goldman Sachs Group Inc and HSBC Holdings Corp have deployed GenAI for everything from boosting back office productivity to empowering wealth managers to offer more personalized advice.

The FSB said GenAI’s broader evolution could also increase threats to the financial sector by increasing “financial fraud and the ability of malicious actors to generate and spread disinformation in financial markets”.

The update about the challenges in monitoring AI’s threat to financial industry comes days after the Bank of England and International Monetary Fund warned of the potential for soaring AI valuations to trigger a sharp market correction. The report was commissioned by the South African presidency of the Group of 20 and delivered before this month’s meetings in Washington.

— By Laura Noonan (Bloomberg News)