The prediction of an impending financial crash by Gary Gensler, the head of the US Securities and Exchange Commission (SEC), has caused quite a stir. In particular, he warned of the potential dangers posed by the use of artificial intelligence (AI) in the finance world. In his view, the widespread use of AI and the associated decision-making based on comparable data models could have a destabilizing effect on the financial markets and ultimately lead to a financial crash.
Mr. Gensler, in an interview with the Financial Times, expressed concern that the reliance of the banking world and other financial services providers on AI could lead to major problems in the future. He addressed that the “mass behavior” that could result from the widespread use of the same data models by many companies could ultimately result in undermining financial stability and possibly provoking a collapse of financial markets.
The possible worst-case scenario Gensler cites states that we are likely to experience a severe financial crisis in the future. In the post-crisis analysis, we would likely have to take note that there was either a specific data aggregator or a specific model that we relied on too heavily. The trigger could be in the mortgage market or the equity market.
The situation is further complicated by the fact that the regulation of AI has not yet been clarified. In fact, AI is already being used in various areas of the financial world, such as robo-advice, broker apps, and the account opening process. The implementation of such technologies often progresses faster than appropriate guidelines can be issued by regulators.
Another obstacle is the fact that many AIs are developed by technology companies that do not fall directly under SEC oversight. In the United States, there is still a legally unclear situation regarding the competent authority for regulating AI. There is currently a discussion as to which aspects of AI require new regulation and which are already covered by current regulations.
In an experiment, ChatGPT, an AI application, was able to prove that it can make better trading decisions than professional traders by analyzing countless financial headlines. Over an eight-week period, ChatGPT was able to achieve five percent growth. In comparison, the ten most successful UK funds suffered an average loss of 0.78 percent over the same period.
