Introduction
Andrew Ng recently compared the transformative power of artificial intelligence (AI) to that of electricity saying “Just as electricity transformed almost everything 100 years ago, today I actually have a hard time thinking of an industry that I don’t think AI will transform in the next several years.”1 Although Ng’s timescale may be a bit optimistic, those who have studied recent developments in AI generally agree that it will have a transformative effect on a wide variety of industries. Techniques developed in machine learning (ML), a subfield of AI, recently achieved considerable public attention with their success in playing the games Go (Hassabis, 2016) and Poker (Condliffe, 2017). Moreover, ML is being used in large-scale production processes such as Amazon’s voice recognition, Google’s search engines and Netflix’s movie recommendations. One industry that has attracted considerable interest and is in the early stages of being transformed is the financial services industry. Indeed, Economist (2017) recently proclaimed, “Machine-learning promises to shake up large swathes of finance.” The transformations induced by AI and especially ML are also likely to have implications for financial supervisors concerned about the conduct and/or the prudent operation of financial firms. At a minimum, supervisors will need to take account of the opportunities for enhanced compliance and safety created by AI, as well as be aware of the ways that AI could be used undermine the goals of existing regulation. However, ideally the development of AI will do more than just challenge the supervisors to keep up with industry; it will also create opportunities for supervisors to more efficiently and effectively deploy their resources to accomplish their missions.
