Yellen to warn of 'significant risks' of AI in finance while acknowledging 'tremendous opportunities'

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Treasury Secretary Janet Yellen is set to warn that using artificial intelligence (AI) in finance carries "significant risks" even as it benefits financial firms, according to excerpts of a speech she is expected to deliver Thursday.

Yellen is set to speak at an AI conference held by the Financial Stability Oversight Council (FSOC) and the Brookings Institution, where she will acknowledge that AI "offers tremendous opportunities for the financial system" while outlining that AI-related risks are at the forefront of the regulatory council's agenda.

"For many years, the predictive capabilities of AI have supported forecasting and portfolio management," Yellen says in the excerpts. "AI's ability to detect anomalies has contributed to efforts to combat fraud and illicit finance. Many customer support services have been automated. Across these and many other use cases, we've seen that AI, when used appropriately, can improve efficiency, accuracy, and access to financial products."

"Specific vulnerabilities may arise from the complexity and opacity of AI models; inadequate risk management frameworks to account for AI risks; and interconnections that emerge as many market participants rely on the same data and models," she says.

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Treasury Secretary Janet Yellen is set to deliver a speech warning about the dangers of AI in finance as well as its benefits. (Drew Angerer/AFP via Getty Images / Getty Images)

Yellen goes on to explain in her prepared remarks that if too many market participants rely on the same AI models and data, as well as cloud service providers, it could reinforce existing biases or create new ones that impact decision-making in financial markets.

"Concentration among vendors developing models, providing data, and providing cloud services may also introduce risks, which could amplify existing third-party provider risks. And insufficient or faulty data could also perpetuate or introduce new biases in financial decision making," she explains.

Despite those challenges, she says that AI-powered tools can help to broaden access to financial services while making them more affordable for consumers.

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Yellen says that there are concentration risks if too many financial market actors rely on the same AI models and data. (Alex Wong/Getty Images / Getty Images)

"Advances in natural language processing, image recognition, and generative AI, for example, create new opportunities to make financial services less costly and easier to access," Yellen says in the excerpts. The secretary also notes that the Internal Revenue Service is using AI for "enhanced fraud detection."

Yellen says that financial regulators who make up the FSOC — which is led by the Treasury Department and also includes the Federal Reserve, among other regulators — will "also continue to support efforts to build supervisory capacity to better understand associated risks," including through the use of scenario analysis.

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Yellen says that AI is at the top of financial regulators' agenda. (Drew Angerer/Getty Images / Getty Images)

"Scenario analysis, often used by firms and governments to understand opportunities and risks in the context of uncertainty, could also be beneficial," she says in the excerpts. "Given how quickly AI technology is developing, with fast-evolving potential use cases for financial firms and market participants, scenario analysis could help regulators and firms identify potential future vulnerabilities and inform what we can do to enhance resilience."

FOX Business' Edward Lawrence and Reuters contributed to this report.