(Feb 19): The Federal Reserve’s top bank cop says the attributes that make artificial intelligence attractive also present risk, with speed and automaticity potentially generating new issues at a wide scale.

Financial regulators have said that AI and other emerging technologies present enormous opportunities, including significant improvements in productivity. But generative AI use could “lead to herding behaviour and the concentration of risk, potentially amplifying market volatility,” vice-chair for supervision Michael Barr said Tuesday in prepared remarks before the Council on Foreign Relations.

“As GenAI agents will be directed to maximise profit, they may converge on strategies to maximise returns through coordinated market manipulation, potentially fuelling asset bubbles and crashes,” Barr said. GenAI can produce different types of content.

He also said that non-banks may be “more nimble and risk-forward” in incorporating artificial intelligence into their operations, which might push more financial activities into less-transparent areas of the system.

“We should be attuned to the impact of GenAI on our economic and political institutions,” Barr said. “There’s a risk that it concentrates economic and political power in the hands of the very few and could lead to the gains being realised only by a small group, while the rest are left behind.”

Barr said that Fed has started using AI with a strong system of internal governance around it. He said it’s being used to test code and that it has improved efficiencies.

Barr, a Biden-era appointee, announced last month that he would step down from his role as the Fed’s top bank cop on Feb 28 or earlier if a successor is confirmed, citing the risk of dispute over the position.

He plans to remain on the board of governors, so President Donald Trump would likely have to appoint a replacement from the current slate of board officials. The next Fed vacancy isn’t expected until 2026, although another board member could decide to step down before then.

Michelle Bowman, who sits on the supervision and regulation subcommittee at the Fed board, is considered to be a possible successor. She has been openly critical of some of Barr’s policy initiatives.

During a House hearing last week, Fed chair Jerome Powell suggested that the central bank could proceed on financial regulation without a vice-chair for supervision. He said the potential for larger swings in policy since the position was created has been “not great for the institutions that we regulate.”

Uploaded by Magessan Varatharaja