Bank of England launches AI review amid UK financial stability risk fears

The Bank of England is launching a fresh review into artificial intelligence and machine learning amid fears the rapidly developing sector could pose risks to the UK’s financial stability.

AI and machine learning have been used across the City for at least a decade, for example, to help detect fraud and money laundering. However, a recent increase in technological advances and available data, as well as falling costs of computing power, had sparked “considerable interest” and more widespread use across the sector, regulators on the Bank’s financial policy committee (FPC) said.

While most companies suggested the way they were using the technology was “relatively low risk”, the FPC warned that wider adoption “could pose system-wide financial stability risks”. That could mean greater “herding behaviour”, where there is a concentration of firms making similar financial decisions that skew markets, and an increase in cyber risks.

New AI and data providers could also end up becoming important participants in financial markets and require closer oversight. The Bank, its regulatory arm the Prudential Regulation Authority, as well as the City watchdog the Financial Conduct Authority will launch a consultation paper on these “critical third parties” later this month.

The FPC concluded that “given the rapid pace of innovation and potentially widespread use cases, the impact of AI and ML [machine learning] … on financial stability needed careful monitoring and consideration”.

The committee added that it would “further consider the financial stability risks of AI and ML in 2024, and, working alongside other relevant authorities, would seek to ensure that the UK financial system was resilient to risks that may arise from widespread adoption of AI and ML”.

News of the fresh review was revealed alongside the Bank’s financial stability report, which suggested that mortgage repayment risks had eased.

Although mortgage holders have been particularly worried about repayments, given the rise in interest rates since 2021, the committee said households and businesses were proving to be relatively resilient in the face of higher-for-longer interest rates in the UK.

About 55% of the UK’s mortgage borrowers have so far had to reprice on to higher-rate contracts, accounting for about 5 million households. The remainder will reprice by 2026, with average monthly repayments expected to increase by £240. That is slightly down from previous expectations of an increase of £250.

While household finances remain “stretched” by higher living costs and interest rates, that has been tempered somewhat by higher-than-expected income growth, the Bank said.

It is now expecting only 1.6% of households – or 440,000 – to shell out more than 70% of their income towards essential living costs and mortgage payments in 2024. That is down from forecasts released in July, which had pointed to an uptick to 2.5%.

Although commercial banks and high street lenders will remain profitable, the committee said net interest margins – a key measure of profitability that accounts for the difference between what is charged to borrowers versus paid out to savers – had likely peaked.