Could AI downturn lead to faster financial market crash?
What's the story
The Bank for International Settlements (BIS), often referred to as the "bank of central banks," has warned that an artificial intelligence (AI) downturn could lead to a sharper and faster crash than traditional banking crises. The warning comes in BIS's annual economic report released today. It highlights how funding for AI is increasingly funneled through hedge funds, private credit vehicles, and other non-bank intermediaries.
Risk factors
Potential blind spots in the system
These non-bank intermediaries, according to Zhang Tao, BIS's Chief Representative for Asia and the Pacific, usually operate with less oversight than traditional lenders. This could create potential blind spots in the system. If there is any sort of market correction, these vulnerabilities could interact and speed up a financial correction much faster than previous banking crisis episodes.
Market impact
Rapid unwinding may lead to financial market upheaval
Zhang further warned that a rapid unwinding of the system could have far-reaching effects on financial markets and raise broader stability concerns. He said, "If the market has any sort of correction, the interconnectedness of the financial system and interplay of vulnerabilities could mean the speed of a correction could be much faster than previous banking crisis episodes."