Risky deregulation of AI increases financial market vulnerability

AI deregulation poses a significant risk to financial markets, as seen by the current direction in the United States compared to Canada’s proposed regulations. While Canada is moving towards stronger AI regulation with the proposed Artificial Intelligence and Data Act (AIDA), the US, under President Donald Trump, is pushing for AI deregulation.

The AIDA, part of Bill C-27 in Canada, aims to establish a regulatory framework to enhance AI transparency, accountability, and oversight. However, some experts argue that it may not be comprehensive enough. In contrast, Trump signed an executive order in January that aims to eliminate perceived regulatory barriers to American AI innovation. This move replaced previous executive orders on AI by former President Joe Biden.

Unlike many countries, including the UK, the US did not sign a global declaration in February to ensure that AI is open, inclusive, transparent, ethical, safe, secure, and trustworthy. The absence of such safeguards leaves financial institutions vulnerable to uncertainties and potential systemic collapse risks.

AI has proven its potential in financial markets by enhancing operational efficiency, conducting real-time risk assessments, increasing income, and predicting economic changes. Research has shown that AI-driven machine learning models excel in identifying financial statement fraud and abnormalities quickly and effectively. These models can detect signs of financial mismanagement before they escalate into crises.

Artificial neural networks, which mimic the human brain by processing information through interconnected “artificial neurons,” and classification and regression trees have demonstrated high accuracy in predicting financial distress. In a study focusing on Toronto Stock Exchange-listed companies, AI models predicted financial distress with a remarkable 98% accuracy. This indicates that AI can offer early warning signals to prevent financial downturns.

However, while AI can streamline manual processes, reduce financial risks, and provide valuable insights, unchecked AI could introduce vulnerabilities that pose threats to economic stability. Trump’s deregulation could potentially give Wall Street and major financial institutions excessive power over AI-driven decision-making tools without adequate oversight. This lack of ethical boundaries in profit-driven AI models, especially in credit evaluation and trading, may exacerbate economic inequality and create systemic financial risks.

In conclusion, the growing trend towards AI deregulation in the US raises concerns about the unchecked use of AI in financial markets. While AI offers immense benefits, it is essential to strike a balance between innovation and regulation to safeguard financial stability and prevent potential economic crises.