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AI in Finance: Navigating the Promises and Perils

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Safak Costu
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AI in Finance: Navigating the Promises and Perils

Artificial Intelligence (AI) is permeating the financial sector, touted for its potential to enhance efficiency and innovation. Yet, as this technology encircles finance, it brings with it a set of potential risks that warrant attention. Experts warn that the opacity of AI systems, systemic errors, susceptibility to biases, and reduced human oversight could compromise the reliability of financial systems and exacerbate inequalities.

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AI's Penetration into Finance: A Double-edged Sword

Acclaimed author Yuval Noah Harari and Gary Gensler, the chair of the US Securities and Exchange Commission, have both raised concerns about AI's increasing control over world financial systems. They warn that the complex financial tools created by AI are often beyond human comprehension, potentially leading to catastrophic financial crises or even triggering wars.

Moreover, the concentration of power in a few AI platforms poses another risk. This issue underscores the need for global cooperation and ethical frameworks to safeguard against the challenges brought about by AI.

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AI in Risk and Compliance: Harnessing Potential, Managing Risk

Financial services are increasingly adopting AI for risk and compliance measurement, with fintech leading the charge. The benefits of AI in this area are manifold, including improved efficiency, rapid data processing and analysis, and cost savings. However, there are also challenges and obstacles to be navigated.

Ensuring the transformative potential of AI is harnessed responsibly and sustainably calls for risk management at multiple levels within an organization, including model risk, AI system risk, and enterprise risk. The importance of human-centric risk assessment and management cannot be overstated.

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AI's Promise and Perils in Banking

A recent survey by UK Finance and Oliver Wyman revealed that financial services firms are piloting generative AI and preparing for potential risks. The banking industry, in particular, sees substantial potential in AI for productivity improvement and operational effectiveness. However, collaboration with policymakers and regulators is crucial to define best practices and address potential risks.

In the specific context of Bangladesh's banking industry, AI shows promise in reducing non-performing loans by evaluating data from various sources, identifying high-risk borrowers, and detecting fraudulent behavior. Yet, the need for human oversight and innovation remains paramount, as discussed by Ilhan I, an experienced consultant at Amaris Consulting. He emphasizes that while AI can enhance risk management expertise, it also poses challenges such as potential loss of developer expertise and client interaction.

As AI continues to shape the financial sector, the importance of understanding and mitigating the associated risks becomes increasingly critical. Striking a balance between leveraging AI's benefits and protecting against its potential pitfalls is vital to ensuring the responsible and sustainable integration of AI in finance.

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