BlockBeats reported on July 24 that the International Monetary Fund (IMF) warned artificial intelligence is moving into core parts of the financial system and changing how trading, lending, regulation and financial infrastructure operate. The IMF said widespread and synchronized use of AI models could amplify market swings and introduce new systemic risks.
Three priorities for regulators
The IMF said financial regulators should focus on three areas.
- Strengthen governance over AI-driven trading, lending activity and supervisory technology, or SupTech.
- Improve transparency around AI use, model dependence and risk exposure across the market.
- Expand international cooperation to improve the resilience of the financial system and strengthen cyber defenses.
AI is shortening decision cycles in markets
The IMF said AI is compressing decision-making time in financial markets. Machine learning models are already widely used for trading strategies, high-frequency signal generation, corporate earnings analysis and credit risk assessment.
In normal market conditions, the fund said AI can improve liquidity, lower costs and sharpen risk identification. During periods of market stress, though, AI may turn into a volatility amplifier. If large numbers of AI models adjust positions at the same time based on similar data and signals, that could trigger what the IMF described as an “AI herd effect,” intensifying volatility and even increasing the risk of future flash crashes.
Opaque models and concentrated infrastructure dependence
The IMF also said the opacity of AI models adds to supervisory challenges. Even large financial institutions may struggle to explain how AI strategies make decisions in extreme market conditions, which could weaken regulators’ ability to identify risks in advance.
At the same time, the IMF warned that concentrated dependence on AI infrastructure is becoming a new source of risk. Many financial institutions rely on a small number of cloud service providers, data vendors and AI model providers. If a critical supplier is hit by a technical outage, cyberattack or geopolitical shock, the disruption could affect multiple institutions at once.
AI should assist supervision, not replace people
In regulation, AI is helping central banks and financial institutions improve market monitoring, risk identification and supervisory efficiency. Even so, the IMF said AI should strengthen supervisory judgment rather than replace human decision-making.