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Global regulators step up oversight of AI risks in finance

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Global financial watchdogs are intensifying their scrutiny of artificial intelligence (AI) in the banking sector, warning that heavy reliance on shared AI systems could threaten financial stability. As the use of AI accelerates across global markets, regulators are moving to monitor systemic risks and strengthen their own technological capabilities.

In a report published Friday, the Financial Stability Board (FSB) — which advises G20 governments — said widespread adoption of the same AI models and infrastructure could create “herd-like behaviour” across financial institutions. “This heavy reliance can create vulnerabilities if there are few alternatives available,” the FSB cautioned, warning that such concentration could amplify shocks during market stress.

A separate study by the Bank for International Settlements (BIS) urged regulators and central banks to “raise their game” in monitoring and using AI. The BIS said authorities must not only understand AI’s potential to reshape markets but also adopt the technology themselves to improve supervision and data analysis.

The report comes amid an international race — led by the United States and China — to dominate next-generation AI tools and applications, including those that underpin financial services.

While the FSB said there is currently “little empirical evidence” that AI-driven correlations have directly impacted market outcomes, it warned that AI could increase exposure to cyberattacks and algorithmic fraud.

Some jurisdictions have already acted. The European Union’s Digital Operational Resilience Act (DORA), which took effect in January, establishes new rules for digital and AI-based systems used by financial institutions.

The emerging consensus among regulators is clear: AI promises efficiency and insight, but without vigilant oversight, it could become a new source of systemic risk in global finance.

Europol Urges Financial Sector to Prepare for Quantum Computing Risks

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Europol’s Quantum Safe Financial Forum has called on Europe’s financial industry to start preparing for the potential risks posed by quantum computers, which could break commonly used encryption methods within the next 10 to 15 years. The group, which focuses on safeguarding sensitive financial data, issued a warning on Friday about the risks quantum computing poses to customer confidentiality, peer communications, authentication processes, and trust in digital signatures.

Although quantum computers capable of such threats may still be a decade or more away, the timeline could accelerate, the forum warned. Despite the emerging risks, the forum believes new regulations are unnecessary, as current European Union data protection laws are sufficient.

The Quantum Safe Financial Forum includes representatives from the U.S., European, and British central banks, along with major financial institutions such as Allianz, Santander, Barclays, BNP Paribas, Mastercard, Moody’s, and European banking associations.

Quantum computers operate by leveraging subatomic particles to perform calculations more efficiently than traditional binary computing systems. Given their potential to decrypt today’s secure communications, the forum recommended that financial institutions begin identifying which cryptographic standards are vulnerable to quantum computing and start drafting operational plans to mitigate future risks.

The forum also cautioned that criminals may already be storing sensitive encrypted data with the intention of decrypting it once quantum computing becomes more powerful.

The U.S. government has already set a 2035 deadline for federal agencies to become “quantum resistant,” underscoring the urgency for global financial institutions to follow suit.

TCS Sees Revival in Retail and Manufacturing Sectors After Banking Recovery

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Tata Consultancy Services (TCS), India’s leading software-services exporter, is optimistic about a recovery in its retail and manufacturing sectors in North America, following a strong rebound in its banking and financial services segment. The company’s CFO, Samir Seksaria, pointed to improved consumer sentiment, driven by strong holiday season sales in the U.S. and a resolution of some labor issues in the manufacturing sector, as key factors contributing to this optimism.

Seksaria’s comments reflect a cautious yet hopeful outlook, acknowledging the broader economic uncertainties and persistent inflation that have led clients to tighten their tech spending. Despite the challenges, TCS expects a recovery in its retail and manufacturing verticals, which are among its top revenue sources. Retail and manufacturing combined account for a significant portion of TCS’s $29 billion in annual revenue, with recent sales figures from major U.S. retailers like Walmart, Amazon, and e-commerce platforms such as Shein and Temu contributing to the positive outlook. U.S. online spending also saw a nearly 9% increase, reaching $241.4 billion during the recent holiday season.

However, the company continues to face a decline in its North American revenue for the fifth consecutive quarter, although the banking and financial services sectors have posted their strongest performance since mid-2023. TCS’s communications and media vertical, a high-investment segment currently underperforming, could also benefit from potential interest rate cuts, Seksaria suggested.

Echoing CEO Krithivasan’s sentiment, Seksaria noted that the incoming U.S. administration could remove policy uncertainties and boost client confidence, further encouraging investment in discretionary tech projects. As a result, TCS’s stock saw a 5.6% increase in a single day on Friday, marking its highest rise since July 2024.

TCS also addressed concerns about the increasing trend of insourcing by multinational corporations, which may reduce the outsourcing of IT services to companies like TCS. Many global companies are expanding their in-house teams and setting up global capability centers (GCCs) in India, which is projected to reach a $105 billion market size by 2030. While this could initially offer cost advantages, Seksaria pointed out that the cyclical nature of opening and closing GCCs may pose challenges for long-term sustainability.

TCS has also managed to adapt to this shift, acquiring units such as the captive arm of Danske Bank in 2023 and Post Bank AG’s unit in 2020, indicating a flexible approach to industry changes.