"Nearly unavoidable."

AI Crash

Artificial intelligence is making forays into the financial industry — but the chairman of the U.S. Securities and Exchange Commission (SEC) warns that increasing reliance is likely to trigger the next financial crisis.

That's right. SEC head Gary Gensler told the Financial Times that it's "nearly unavoidable" that AI will lead to an economic crisis, calling on regulators to take measures to reduce AI risk factors in the financial sector.

What gives Gensler pause, he explained to the news outlet, is that the tech companies developing AI models for the financial industry are outside of the scrutiny of Wall Street regulators.

And if financial firms end up using the same models, it could mean they'll make the same decisions in lockstep — leading to a potential calamity in the markets.

"I do think we will in the future have a financial crisis... [and] in the after action reports people will say 'Aha! There was either one data aggregator or one model... we’ve relied on'," said Gensler. "Maybe it’s in the mortgage market. Maybe it’s in some sector of the equity market."

Guard Rails

Financial firms like Morgan Stanley and Goldman Sachs have been racing to add AI tech into their processes, often in the form of an AI assistant that brings up research reports or crafts talking points for client meetings. And JPMorgan Chase is developing a platform similar to OpenAI’s ChatGPT that would help clients pick investments.

To address this evolving landscape, the SEC in July proposed a new rule that requires broker-dealers and advisers to address any conflicts of interest when they harness "predictive data analytics and similar technologies."

This may just be the start, according to the Financial Times, as American regulators ponder whether additional rules should be implemented or use existing statutes. Meanwhile, Europe is moving full steam ahead with AI regulation that the European Parliament is calling the the "world’s first comprehensive AI law."

But ultimately, all that may be a moot point. AI technology is evolving rapidly as startups compete to come out with next big thing, and the inherent slowness of bureaucracies will undoubtedly fail to keep up — even if the seeds of a new financial crisis are already sown.

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