Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
FSB’s Warnings of Hidden Stakes of AI in Finance
AI Risks | Nov 19, 2024
Image: Financial Stability Implications of Artificial Intelligence (FSB)
Why the FSB’s Warning Matters More Than You Think
For those who think AI is simply automating tasks, in new report published Nov 14, 2024 titled, "The Financial Stability Implications of Artificial Intelligence" (40 page PDF) the Financial Stability Board (FSB) warns think again. AI is fundamentally changing how financial institutions operate, strategize, and compete. In less than two years, Generative AI and innovative large language models like ChatGPT are game changing the space. Banks and financial institutions are already investing in AI technologies or exploring its capabilities for using AI for everything from complex underwriting to optimizing investment allocations and autonomous bots in the agentic web.
See: NIST Insights: GenAI Risk Management Framework
The FSB is warning that these advancements come with deeper and much more significant risks where financial markets would be at the whim of AI systems all reacting in unison given that they are trained on mostly identical data, making the same decisions at lightening speed, all magnifying shock risks that could trigger widespread instability. Let's break it down.
Risk 1: Too Much Reliance on the Same Players
The report highlights that AI relies on special tech infrastructure such as specialized hardware (i.e., NVIDA chips), cloud services, and pre-trained models that collectively are creating a 'single point of failure' risk. The risk is about third-party dependencies and concentration in the AI supply chain. There are only a limited number of providers and in the event of a key provider facing disruption, it could create a systemic vulnerability that could paralyze global financial operations.
Risk 2: Groupthink on Steroids
As mentioned above, AI models often use the same training data and algorithms which means that many institutions could end up making similar AI-driven decisions under stress. For example, if trading algorithms automatically respond to market drops all in the same fashion, then liquidity could dry up instantly triggering a market meltdown (instead of a routine dip).
See: Canada and Trump Risk Index What Fintechs Need to Know
We've all heard of 'flash crashes' or recent 'run on banks' that are hyper sensitive in the digital age (think pressing a button to get ones money out versus back in the day, lining up at a bank branch to withdrawal funds). Further, mass adoption of AI on a much larger scale could make these event risks more frequent and severe.
Risk 3: The Rise of AI-Powered Fraud
AI technologies are helping both good and bad actors. These days, GenAI can generate realistic fake identities, deepfake videos, and even manipulate sentiment using misinformation campaigns. Imagine a fake video of a CEO announcing a company’s collapse and markets responding negatively before the truth surfaces. Further, a deeper issue of fraud in an AI driven world is that the current fraud detection systems used by governments, central banks, financial institutions, pretty much everyone were not designed to protect against AI smart attacks. And it will take time before these same tools that institutions are using to optimize their operations can also be sophisticated to enough to protect themselves from escalating threats. The 'cat-mouse' game of fraud has always been there but AI risks increasing the gaps in any system.
Risk 4: Misaligned Incentives
Simply put, artificial intelligence tools and the ownership entities behind them can prioritize profit over ethics. One example is an AI bot looking to optimize profit may find it beneficial to spread disinformation to then profit from shorting a stock. While the bot may generate returns in the short term, the long term damage to financial markets and the trust in the systems that manage them could become toxic.
So What Needs to Happen?
There needs to be a mix of better oversight and governance, smarter regulations and more international collaboration. Financial institutions need to rethink how they will adopt and deploy AI by:
See: OECD-FSB Discuss New AI Trends in Finance
- Creating AI solutions by working with a wider range of partners (to mitigate supply chain risk) and develop in-house if possible.
- Building robust security and risk management programs that can withstand disruptions and remain resilient.
- Establishing clear governance practices of how AI systems align with regulations and ethical principles.
Conclusion
The FSB's report is a warning to financial institutions, regulators, and global leaders that they must act now and address vulnerabilities in AI governance, third party dependencies, and security. The stakes are high, and the time to act is now.
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