Key points:

  • Federal Reserve Vice Chairman Michael Barr warned on Tuesday that generative artificial intelligence may not deliver the expected significant productivity gains, potentially triggering a pullback in stocks of companies heavily investing in the emerging technology.
  • "The expected value creation from generative AI may be overhyped, with people anticipating transformative breakthroughs rather than incremental productivity improvements," Barr said in a speech. "If reality falls short of expectations, this could trigger a market correction for companies heavily investing in the technology."
  • Barr believes generative AI could bring "broad productivity gains" and evolve along one of two paths: either incrementally enhancing existing human work, or triggering "transformative changes that greatly expand human capabilities and have far-reaching impacts."

In-depth analysis:

According to a survey by Gartner, nearly eight in ten (77%) chief financial officers plan to increase spending on generative AI and other technologies this year, despite ongoing economic and geopolitical disruptions. About half (47%) of finance leaders plan to increase technology budgets by at least 10%, while another 30% plan to keep spending increases between 4% and 9%.

"The continued focus on technology aligns with the development of traditional AI and generative AI, which are expected to drive new products, enhance decision-making, and improve productivity," said Randeep Rathindran, vice president of research in Gartner's finance practice, in a statement.

Barr noted that in the financial sector, generative AI could be a double-edged sword, both increasing "existing vulnerabilities in the system and strengthening sources of resilience." "Attractive trades become more crowded, but risk managers gain new insights; malicious actors gain new tools, but cyber defenders are better equipped," he said in a speech at the Council on Foreign Relations in New York.

Barr emphasized that CFOs and relevant participants in the public and private sectors need to proactively guard against the potential risks of the technology. "As long as financial regulators, corporate risk managers, and others responsible for managing downside risks prioritize efforts to keep pace with the evolution of the financial ecosystem, there is no reason to believe the balance of risks will shift entirely. Of course, keeping pace itself will pose a challenge."

Barr cited examples where generative AI could bring incremental gains in finance, such as community banks using chatbots to provide tailored financial advice based on local knowledge. Financial institutions of all sizes could make progress by applying generative AI in compliance, fraud detection, risk management, and document analysis.

In the second scenario, generative AI would trigger profound changes, making finance "fundamentally different." On this path, "individuals with access to hyper-personalized financial planning and businesses with innovative products and services seamlessly connect through nearly frictionless or novel forms of financial intermediation." Traders and risk managers would use generative AI analytical tools to obtain dynamic real-time data from public and private sources.

To harness the benefits of generative AI while limiting its risks, Barr suggested that the Federal Reserve and financial institutions should invest in the technology, integrate it into workflows, and train employees to use it responsibly. "The financial regulatory community should respond to the changing environment with agility and flexibility. Furthermore, beyond the financial sector, collaboration among governments, private enterprises, and research institutions is crucial to ensure that generative AI systems are not weaponized in catastrophic ways."