The Political Economy of AI-Driven Financial Supervision

AI-reliance is expected to improve risk management across the financial services industry, reinforcing the dominance of private ordering in ‘normal times’.

From a supervisory perspective, the use of AI can be expected to decrease regulatory enforcement costs while providing technology-advanced players with opportunities to game the regulatory system.

More fundamentally, AI-reliance is unlikely to either significantly improve the prompt and effective handling of systemic incidents or to increase systemic risk. However, the use of AI may go hand-in-hand with significant job losses.

Overall, the use of AI can be expected to have an impact on the respective roles of private ordering and state regulation. The former will become (rapidly) dominant in normal times while the latter will (slowly but increasingly) target systemic issues.