Central Banks Must Embrace AI to Maintain Stability, Says BIS
The Bank for International Settlements (BIS) has issued a stark warning: central banks must actively integrate artificial intelligence (AI) into their operations to effectively maintain price and financial stability. In its annual report, the BIS emphasizes the increasingly significant impact of AI across various sectors, particularly finance, and argues that central banks are facing a crucial juncture in adapting to these technological advancements.
Key Takeaways:
- AI is fundamentally reshaping the financial landscape, impacting economic activity, financial markets, and ultimately, price and financial stability – areas central banks are mandated to oversee.
- Central banks need to understand AI’s influence on inflation, as AI-powered firms can adjust prices more dynamically in response to macro changes.
- AI is also revolutionizing how central banks operate, as financial institutions extensively rely on AI for functions like risk management, fraud detection, and customer service.
- Central banks must actively collaborate to share knowledge, data, best practices, and AI tools, as the rapid adoption of AI presents both opportunities and risks.
AI’s Impact on Central Bank Operations
The BIS report highlights two key ways in which AI is reshaping central bank operations:
1. Economic Stewardship:
AI’s influence on finance extends to economic activity, driving changes in productivity, consumption, investment, and labor markets. These impacts ripple through to price and financial stability, demanding a robust understanding of AI’s influence from central banks.
2. Central Bank Operations:
AI is increasingly embedded within financial institutions, impacting risk management, fraud detection, and customer service. This necessitates a proactive approach from central banks to understand how these AI-powered systems affect the financial landscape and the effectiveness of their own policies.
Central Banks Are Taking Action
Several central banks have already begun integrating AI into their operations. Notably, the European Central Bank (ECB) launched the Athena project in 2023, leveraging AI to analyze vast volumes of documentation and detect irregularities for banking supervisors.
Furthermore, central banks are utilizing AI to assess climate-related financial risks. The BIS, in collaboration with several central banks, initiated the Gaia AI project in March, aiming to analyze corporate disclosures on carbon emissions and environmental factors, providing a clearer picture of climate-related financial risks.
Navigating the Risks of AI Adoption
The BIS acknowledges the benefits of AI but emphasizes the need for vigilance in its adoption. One primary concern is the increase in cybersecurity threats exacerbated by AI.
- Traditional phishing attacks, where attackers try to steal credentials by mimicking reputable entities, are amplified by generative AI’s ability to create even more convincing phishing emails, malware, and fake identities.
- AI advancements also introduce new cyber risks, such as prompt injection attacks and data poisoning, methods that could manipulate AI systems.
The BIS report concludes that collaboration among central banks is crucial to address these emerging challenges. Sharing knowledge, data, best practices, and AI tools will be essential for navigating the complexities of AI adoption and ensuring the stability of the financial system in a rapidly evolving technological landscape.
The Need for a Collaborative Approach
The BIS argues that the exchange of information on policy issues arising from AI is critical due to its rapid evolution. This includes sharing insights on the role of central banks as data producers, users, and disseminators. This collaborative approach is essential for central banks to effectively address the multifaceted challenges and opportunities posed by AI.
As AI becomes increasingly embedded in the fabric of the financial system, the BIS’s call for central banks to "raise their game" reflects the urgency of adapting to this transformative technology. The future of financial stability hinges on a proactive and collaborative response from central banks as they navigate the complexities and risks of AI integration.
