German Regulator Warns of Risks From Muddied Ties Between AI Firms

Germany’s financial regulator is reportedly warning banks of risks from unclear ties between artificial intelligence companies.

“We’re currently observing the development of both vertical and horizontal connections which are hard to see into from the outside,” Nikolas Speer, the head of banking supervision at BaFin, said at a conference on IT resilience Thursday (Dec. 4), per a Bloomberg News report.

The report notes that these comments highlight rising worries among regulators in Europe over how AI adoption will add to banks’ dependence on foreign tech giants.

Earlier this week, Bloomberg added, the Bank of England warned that a correction in AI stocks could infect wider debt markets and pointed to early warning signs in credit default swaps of companies depending on debt to finance their investments.

Speer pointed to “an increasing clustering” of the operators of artificial intelligence models, cloud providers, chipmakers and data centers through shareholdings, the purchase of computing power and other contracts.

“This also creates a concentration risk in the medium-term,” he said. “It presents you as users with at least the same challenges you’re already facing in the use of cloud services.”

The regulator’s comments come two months after separate reports from the Financial Stability Board (FSB) and the Bank for International Settlements (BIS) calling on financial authorities to monitor the effects of AI use.

In its report, the FSB said that financial institutions may become too reliant on too few third-party generative AI service providers.

“The FSB encourages national authorities to enhance their monitoring approaches, leveraging the indicators presented in the report,” the organization said in a press release. “To support these efforts, the FSB will facilitate alignment in taxonomies and indicators through cross-border cooperation.”

For its part, the BIS contended that while the latest artificial intelligence tools have allowed central banks, financial regulators and supervisory authorities to improve their efficiency and policymaking, the technology also creates potential obstacles in terms of governance, investment in human capital and IT infrastructure.

To address the rising challenges presented by the adoption of AI by households and businesses, central banks and other supervisory and regulatory authorities should “upgrade their capabilities both as informed observers of the effects of technological advancements and as users of the technology itself,” BIS said.

“For example, central banks as observers need to stay ahead of the impact of AI on economic activity through its effects on aggregate supply and demand,” BIS said in its report. “As users, they need to build expertise in incorporating AI and non-traditional data in their own analytical tools as well as in how to use AI to produce reliable data.”

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