The central bank of India warns about the dangers of AI

The governor of the central bank of India has issued a warning about the potentially destabilizing effects of artificial intelligence (AI) in finance, urging careful regulation to avoid systemic risks and technological vulnerabilities.

Let’s see all the details below. 

The central bank of India warns of the dangers of AI in the financial sector 

The intelligenza artificiale (AI) is rapidly transforming the global financial sector, bringing with it numerous advantages, such as the optimization of services, cost reduction, and greater efficiency.

However, alongside these benefits, increasingly significant concerns are emerging about the impact that the widespread adoption of AI could have on financial stability. 

Recently, the governor of the Reserve Bank of India (RBI), Shaktikanta Das, emphasized the risks that AI could pose, urging caution.

In a speech delivered in New Delhi on October 14, Das highlighted the potential dangers associated with the increasing use of AI and machine learning in financial services. 

Among the main concerns is the concentration of power in the hands of a few large technology providers. 

If such systems were to fail or experience interruptions, the risks to the entire financial system could become systemic. 

This scenario raises questions about the resilience of the sector and its ability to cope with potential crises stemming from such technological dependencies.

Risks related to technological concentration and cyber vulnerabilities

As mentioned, one of the main concerns expressed by Das regards the growing power concentrated in a few providers of AI-based technological solutions.  

If these companies were to experience dysfunctions, their impact could spread throughout the financial system, with potentially disastrous consequences. 

This scenario is not new: even the European Central Bank (ECB) has recently raised similar concerns.

Specifically warning that the centralization of AI could lead to herd behavior, market manipulations, and an excessive correlation among different financial operators.

Das also highlighted that, although AI can improve risk management by introducing more efficient processes and intelligent automations, it brings with it new vulnerabilities. 

Among these, the increase in the risk of cyber attacks and data breaches. 

As banks and financial institutions increasingly rely on AI for their daily operations, it becomes crucial that cyber defenses are up to the new threats. 

The use of opaque and complex algorithms represents an additional risk. In case of errors or anomalies, it might be difficult to trace the causes of the problem and correct them promptly.

The concerns of Das are in line with those expressed by other global financial authorities. 

The ECB, in a report published in July, highlighted how the adoption of AI can introduce new operational risks and market concentration, making financial systems more vulnerable. 

The Central Bank of Canada recently released a similar report, highlighting how AI can not only improve risk management but also amplify liquidity crises and accelerate bank runs in case of market volatility.

The global framework of concerns about AI

An additional critical issue concerns the predictive capacity of artificial intelligence. Although it is capable of analyzing large amounts of data to anticipate market trends or assess credit risk, AI models can sometimes generate errors or distorted predictions. 

Emphasizing consequently the problems instead of solving them. 

Furthermore, the intensive use of computing resources to power AI systems is already contributing to an increase in energy demand, with consequent increases in operational costs and potential impacts on climate change.

To address these risks, central banks around the world are urging financial institutions to work closely with regulators and technology providers. 

The objective is to develop a regulatory framework that mitigates vulnerabilities without stifling innovation.

More rigorous regulations could help prevent the emergence of technological monopolies and reduce the risks associated with dependence on a few large companies.

In India, the Reserve Bank has already started to implement policies aimed at ensuring that the adoption of artificial intelligence takes place in a safe and sustainable manner. 

However, Das acknowledged that this is only the first phase of a long and complex process. Artificial intelligence is still an evolving technology, and its potential risks are not yet fully known.