Reserve Bank of New Zealand Warns of AI Risks to Financial Stability

NZ central bank sees AI adoption posing risk to financial stability

The Reserve Bank of New Zealand warns that AI adoption in finance poses risks like system errors, data issues, and market concentration, though it also offers benefits such as improved risk assessment and productivity. The central bank pledges ongoing monitoring to manage AI-related uncertainties and ensure financial stability.The rapid acceleration of artificial intelligence adoption in financial services presents a risk to financial stability, the Reserve Bank of New Zealand said in a report on Monday. "Errors in AI systems, data privacy concerns and market distortions could amplify existing risks," the report said. "The growing reliance on a small number of third-party AI providers may also contribute to market concentration, creating new channels for contagion and increasing the potential impact of cyber-attacks." However, it added that AI tools and models were also providing benefits, including improved productivity, greater modelling accuracy, enhanced risk assessment capabilities, and strengthened cyber resilience. The report was released ahead of the twice-annual Financial Stability Report, due on Wednesday. Kerry Watt, director of financial stability assessment and strategy at the central bank, added in a statement that there is considerable uncertainty around how AI will shape the financial system. "We will continue to closely monitor developments in AI technology, adoption trends, and the evolving regulatory landscape, to ensure that the financial system remains well-positioned to manage emerging risks," Watt said.

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The rapid acceleration of artificial intelligence (AI) adoption in financial services presents both opportunities and risks to financial stability, according to the Reserve Bank of New Zealand in a special topic from the upcoming May 2025 Financial Stability Report. As AI tools and models become increasingly sophisticated and widely integrated across the financial services sector, they offer significant potential benefits. These include improved productivity, greater modelling accuracy, enhanced risk assessment capabilities, and strengthened cyber resilience - helping financial institutions better detect and manage threats. Alongside these opportunities lie potential vulnerabilities. Errors in AI systems, data privacy concerns and market distortions could amplify existing risks. The growing reliance on a small number of third-party AI providers may also contribute to market concentration, creating new channels for contagion and increasing the potential impact of cyber-attacks. "There is still considerable uncertainty around how AI will shape the financial system," said Kerry Watt, Director of Financial Stability Assessment & Strategy. "While its impact could be positive, especially in enhancing resilience, it could also introduce or amplify vulnerabilities." Regulated entities are expected to understand and manage AI-related risks as part of their existing obligations. The special topic notes that it is important that regulatory frameworks keep pace with technology developments to support effective risk management by industry. We will continue to closely monitor developments in AI technology, adoption trends, and the evolving regulatory landscape, to ensure that the financial system remains well-positioned to manage emerging risks.