European regulators and central bankers have warned that rulemaking is lagging behind rapid progress in agent-based AI and called for guardrails to protect the financial system.
The deputy governor of the Bank of England, Sarah Breeden, is one of several central bank governors to say that agentic AI can escalate volatility during periods of market stress.
Breeden asked whether guardrails were needed, “analogous to circuit breakers or kill switches that would limit or halt trading across a market if faulty AI models caused a market crash,” she said. he said on Tuesday at the annual meeting of the European Central Bank in Sintra, Portugal.
U.S. companies are leading the way in AI investment and pioneering model development, and the European financial system provides fewer capital channels for AI apply compared to U.S. stock markets. Overly cautious regulation could widen this gap even further as AI companies may seek jurisdictions with lower compliance requirements.
Cybersecurity and financial risk warnings
President of the European Central Bank, Christine Lagarde w interview on Thursday with French retailer Les Echos warned that artificial intelligence technology poses “serious risks.”
“For about a decade we have been talking about cybersecurity threats, hacks, data theft and so on,” Lagarde said. “But as artificial intelligence models accelerate and deepen, we face much greater risks because it is happening very, very quickly and because the means of defense – and the necessary financial resources for them – have not yet been found.”
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Meanwhile, Nikhil Rathi, director general of the UK Financial Conduct Authority, he said on Thursday, CNBC Squawk Box said that conventional regulatory cycles do not work in the era of rapid development of artificial intelligence.
“Technology is moving incredibly fast and we need to think differently about some of the innovations we see in artificial intelligence,” Rathi said.
“The reality is that some of these technologies now take weeks or months to roll out, and the traditional rulemaking cycle just doesn’t work that way, so we need to think about new tools and a different way of working with the market in a more collaborative way.”
Central bankers, particularly in Europe, have raised the same red flags about cryptocurrencies, saying it could disrupt the conventional financial system.
Bankers warn about the risk of artificial intelligence collapse
The Bank for International Settlements warned on June 28 that the “explosiveness” of artificial intelligence could have sedate financial consequences.
If central banks tighten policy to contain inflation, it could trigger a “sudden withdrawal.” [AI] asset prices after a long period of exuberant risk-taking,” which could create a “distorting macrofinancial feedback loop,” the BIS said.
Breeden said debt financing is growing rapidly. “We have therefore assessed that the consequences of any decline in AI-related asset prices could increase significantly,” she said.
Meanwhile, Tobias Adrian, director of the IMF’s Foreign Exchange and Capital Markets Department, he said in a June 30 interview with Bloomberg, he said there was a “potential maturity mismatch between the duration of real assets and the duration of debt.”
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