The rating agency Moody’s has said the race to adopt AI is putting big banks at the mercy of a small group of Silicon Valley firms, leaving them vulnerable to widespread outages and price gouging by profit-hungry tech bosses.
The financial sector’s efforts to integrate AI into day-to-day operations will eventually cut costs and increase revenues across the City and Wall Street, Moody’s said.
But that will require “substantial investments”, and with so many rivals racing towards the same goal, many of those benefits will end up being “competed away”.
AI will also create bigger risks around data privacy, cybersecurity, fraud and so-called “deposit flight”, as well as an overdependence on a small number of tech firms, the rating agency warned.
That will raise concerns for bosses across the financial sector. More than 75% of City companies now use AI, according to a UK Treasury select committee report published in January, with insurers and international banks among the biggest adopters. They are mostly using it to automate administrative tasks or even help with core operations, including processing insurance claims and assessing customers’ creditworthiness.
“The reliance of most financial firms on a relatively small set of foundation AI model and cloud computing providers risks creating a systemic dependency,” the Moody’s report said.
“This is because a model outage at one major provider could potentially spread quickly across customers and sectors. As AI adoption deepens, regulators may increase their focus on operational resilience and third-party concentration in the AI model stack.”
The AI race also risked creating “vendor dependence risk”, Moody’s said, meaning that “a set of dominant AI model and infrastructure providers could, over time, exert control over the price of AI services”. That issue is likely to emerge as the bosses of loss-making generative AI companies, including the ChatGPT creator OpenAI and the Claude owner Anthropic, come under pressure to deliver profits for investors.
“While this could pose credit risks to financial firms, they would nevertheless retain control over key assets, including proprietary data,” Moody’s said. Many big banks and insurers also have longstanding experience negotiating down tech contracts, and may be using open-source AI models, and striking key partnerships, to try to offset “dependency risks”.
Lloyds Banking Group’s chief executive, Charlie Nunn, recently doubled down on AI investment plans with a £13bn strategy that would involve using the technology to lure new business, improve efficiency and increase payouts for shareholders.
That will involve £2bn of cost cuts, which Nunn said would affect staff. “That is going to impact work. It is going to require us to continue to reskill people and hire new people, but that’s been my history for 30-odd years in financial services.”
Moody’s acknowledged the potential blow to some staff, who could be deemed replaceable as a result of new tech. Its report said there was a 20% chance that, by 2030, AI will be able to do the work of a “solid mid-level employee”.
For banks, AI might also make it easier for customers to switch to accounts offering higher interest rates, creating the possibility that large chunks of cash could be moved at short notice. “In this context, depositors’ trust in the institution and the resilience and stability of deposit funding are critical,” Moody’s said.
