Banking regulatory says risks related to AI are among the top threats the financial system now faces
“The dominance and global reach of some third-party service providers creates concentration risk that could cause a third-party incident to affect multiple institutions at once as well as exposure to incidents outside of Canada,” OSFI said about how Canadian institutions are highly reliant on a “complex network” of third parties.
It said the absence of “robust regulatory frameworks” in many third-party industries could make institutions vulnerable to risks such as data breaches and cyberattacks.
“Cyber incidents continue to accelerate across all industries, affecting Canadian institutions and their third-party networks,” OSFI said.
To address these risks, OSFI said it will start assessing how prepared institutions are to manage risks related to third parties, technology and the cyberworld, and analyzing how strong their recovery plans are.
It will also assess the impact of AI adoption and strengthen guidelines to reduce AI-related risks, as well as collect third-party data to better understand the related risks and monitor how well any threats linked to cybercrimes and third-party involvement are managed.
Canadian banks have largely embraced AI and its potential. Three of them — Royal Bank of Canada, Toronto-Dominion Bank and Bank of Montreal — each ranked within the Top 10 in AI research globally, according to a report by Evident Insights Ltd. in April.
Central banks, meanwhile, are using AI to forecast inflation figures, track the economy and verify regulatory data, among other tasks, Bank of Canada governor Tiff Macklem said in a speech last week.
“We’ve only just begun to explore this technology,” he said. “With very large and highly disaggregated data sets now available, there is huge potential to use AI to understand how consumers and businesses are behaving and how companies are setting their prices.”
BMO on Wednesday said it appointed a new chief artificial intelligence and data officer. Kristin Milchanowski, who used to work at Ernst & Young Global Ltd., will focus on the bank’s “culture of innovation and accountability,” the bank said.
The executive has more than 20 years of experience in the financial sector. She completed her postdoctoral studies in AI at the University of Oxford.
OSFI’s outlook is generally published once a year in the spring, but the regulator can update it if risks “substantially evolve.” In May, OSFI identified risks linked to real estate lending and mortgage, wholesale credit, funding and liquidity, and security amidst geopolitical uncertainty as the top four risks facing the financial sector, but it has now added more risks to watch.
“OSFI will adapt and respond to intensifying integrity and security risks within the Canadian financial system,” Peter Routledge, OSFI’s superintendent, said in a statement.