AI push is putting banks at risk, says Moody's
What's the story
Moody's, a credit rating agency, has warned that the financial industry's rush to adopt artificial intelligence (AI) is making major banks overly reliant on a handful of Silicon Valley companies. This could leave them vulnerable to widespread outages and price gouging by profit-driven tech executives. The warning comes as over 75% of companies have already adopted AI technology, according to a UK Treasury select committee report published in January.
Cost implications
Potential risks flagged by Moody's
The integration of AI into day-to-day operations is expected to lower costs and boost revenues across the industry and Wall Street. However, Moody's warns that this will require "substantial investments."
With so many competitors racing toward the same goal, many of these benefits could be "competed away."
The agency also flagged potential risks related to data privacy, cybersecurity, fraud, and an overdependence on a small number of tech firms.
Risk factors
Systemic dependency risks
Moody's report highlighted that the reliance of most financial firms on a small set of foundation AI models and cloud computing providers could create systemic dependency.
A model outage at one major provider could quickly spread across customers and sectors.
As AI adoption deepens, regulators may focus more on operational resilience and third-party concentration in the AI model stack.
Pricing control
Vendor dependence risk
Moody's also flagged a potential "vendor dependence risk" in the AI race.
This means that a group of dominant AI model and infrastructure providers could eventually gain control over the pricing of these services.
The issue is likely to arise as loss-making generative AI companies, like ChatGPT creator OpenAI and Claude owner Anthropic, come under pressure to deliver profits for investors.
Job implications
AI takeover threat to jobs
Moody's acknowledged that the rise of AI could make some employees seem replaceable due to new technology.
The report estimated a 20% chance that by 2030, AI would be able to do the work of a "solid mid-level employee."
Lloyds Banking Group's CEO Charlie Nunn recently reaffirmed his company's commitment to an ambitious £13 billion strategy focused on using AI for business growth, efficiency improvement, and shareholder payouts.
Financial risks
Need for banks to be cautious
AI could also make it easier for customers to switch to accounts offering higher interest rates, potentially leading to large sums of money being moved at short notice.
Moody's said in this context, "depositors' trust in the institution and the resilience and stability of deposit funding are critical."
The agency's warning highlights the need for banks to be cautious about their reliance on tech firms as they adopt AI technology.