US Treasury secretary Janet Yellen is set to caution that while artificial intelligence (AI) in finance could reduce transaction costs, it also carries "significant risks".

According to excerpts from her upcoming speech at a Financial Stability Oversight Council and Brookings Institution AI conference on Thursday, Yellen will emphasise that AI-related risks have become a top priority for the regulatory council's agenda.

The speech highlights specific vulnerabilities that may stem from the complexity and opacity of AI models, inadequate risk management frameworks, and interconnections that arise as many market participants rely on the same data and models.

Additionally, concentration among vendors developing AI models and providing data and cloud services may introduce risks that could amplify existing third-party service provider risks. Yellen also warns that insufficient or faulty data could perpetuate or introduce new biases in financial decision-making.

However, Yellen acknowledges the benefits of AI, such as automating customer support services, improving efficiency, detecting fraud, and combating illicit finance. She notes that advances in natural language processing, image recognition, and generative AI create new opportunities to make financial services less costly and more accessible.

The Treasury Department is in regular communication with financial regulators on their AI-related efforts, including using the technology to mitigate illicit finance risks, such as money laundering, terrorist financing, and sanctions evasions. The Treasury is also using AI tools in the Internal Revenue Service to enhance fraud detection.

Yellen assures that FSOC will continue to monitor AI's impact on financial stability, facilitate information exchange, and promote dialogue among financial regulators.

The council will also support efforts to build supervisory capacity and use scenario analysis to better understand risks and opportunities, as AI technology is developing rapidly with fast-evolving potential use cases for financial firms and market participants.

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