What are the risks to the financial system? It seems the sort of question that a regulator would want to stay on top of all the time, so it’s no surprise that the Central Bank publishes its assessment of possible risks in its Regulatory & Supervisory Outlook every year.
The report itself is relatively new, in only its third year of publication, but it gives a pretty good view of what is keeping the bank’s governor Gabriel Makhlouf and his team up at night.
The latest report and accompanying statement from the bank makes for fairly grim reading.
“Operational risks remain very high for the financial sector, given current geopolitical tensions, advancing digitalisation and increasingly complex operating models,” it said. “Relative to last year, asset valuation and market risks are judged to have increased, as have the risks associated with data, models and AI,” the bank added.
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In layman’s language, that probably can be translated as something along the lines of “the risk of trade wars and actual wars, combined with fears of a stock market and private credit bubble as well as economic disruption from AI have us watching closely what might come down the line”.
“Risks once thought remote are now becoming more likely. The question is no longer whether change will come, but the nature, degree and speed of that change and how we respond collectively,” said Makhlouf.
Still, there is some good news. Inflation, which was front and centre in the regulator’s outlook for 2024 and 2025, has become less of a problem, to the point the bank no longer considers price increases a “key risk”.
On AI, it notes that consumer protection risks can be “amplified” by the technology, while varying levels of take-up and understanding of it can also cause problems. That reflects the general take-up rate for any new technology.
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It also highlights that so-called agentic AI has been used in some quarters to run transactions autonomously. Usually those deals involve crypto.
“Developing robust methods to assess AI-related conduct risks and to evaluate the efficacy of safeguards is important, yet this area remains significantly underdeveloped compared to the technology industry’s capabilities,” it said.
Once again, it seems regulators are being outpaced by market participants.
