There is disaster looming if you believe Gary Gensler, head of the US Securities and Exchange Commission (SEC). America’s top Wall Street watchdog has issued a stark warning about AI: If regulators don’t act now, Gensler said it is “almost inevitable” that AI will lead to a financial collapse in the next 10 years.
The problem is a world where major financial institutions use the same AI models, Gensler said in an interview Sunday with The Guardian Financial Times. There are not many AI models to choose from, and if everyone uses identical tools, it could lead to herd behavior where banks or other major economic players make the same decisions at the same time. Under these circumstances, a sudden shift in the market can set off a chain reaction that leads to the next disaster.
“I think we will have a financial crisis in the future,” Gensler said, “and in subsequent reports people will say, ‘Aha!’ There was either one data aggregator or one model… We relied on. Maybe it is in the mortgage market. Maybe it is in some sectors.” Stock market.
We are already progressing in this direction. As the Financial Times points out, the finance industry has already rolled out a number of AI tools for consumers and employees alike. Many companies already base their entire business models on data analysis. Over the past year, artificial intelligence has moved from tools reserved for people with advanced training in computer science to an increasingly inexpensive and accessible technology that can be deployed with relative ease.
This trend is accelerating, and our regulatory system is ill-equipped to deal with it. The SEC only has the authority to regulate financial markets, but AI tools fall outside the arena into the hands of technology companies. The government already has a poor record of running Wall Street, and Congress still has not addressed many fundamental issues dating back to the dawn of the Internet. The specter of AI in finance is very real, and there is absolutely no framework to address it.
“It’s a difficult financial stability issue to address because most of our regulation is around individual institutions, individual banks, individual money market funds, individual broker-dealers,” Gensler said. “I think it’s really a common challenge among regulatory agencies.”
Gensler promised to do “the right thing by the American public by enforcing a rule that falls within the law and is upheld by the courts.” At the same time, the man charged with preventing economic catastrophe appears to be already admitting defeat.
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