Wellington, May 5 : The Central Bank of New Zealand warned on Monday that the rise of Artificial Intelligence (AI) in the financial sector presents both opportunities and risks to financial stability.

In its upcoming Financial Stability Report, the Reserve Bank of New Zealand (RBNZ) cautions that increasing reliance on AI could amplify vulnerabilities, with risks including system errors, data privacy breaches and market distortions.

The growing dependence on a few major third-party AI providers raises concerns about market concentration, increasing the potential impact of cyberattacks, the report said.

As AI tools and models become increasingly sophisticated and widely integrated across the financial services sector, they offer significant potential benefits. These include improved productivity, greater modelling accuracy, enhanced risk assessment capabilities, and strengthened cyber resilience - helping financial institutions better detect and manage threats, the report detailed.

"Alongside these opportunities lie potential vulnerabilities. Errors in AI systems, data privacy concerns and market distortions could amplify existing risks. The growing reliance on a small number of third-party AI providers may also contribute to market concentration, creating new channels for contagion and increasing the potential impact of cyber-attacks.," it said.

'There is still considerable uncertainty around how AI will shape the financial system,' said Kerry Watt, RBNZ Director of Financial Stability Assessment and Strategy. 'While its impact could be positive, especially in enhancing resilience, it could also introduce or amplify vulnerabilities.'

The Central Bank highlights AI's potential to boost productivity, enhance risk assessment, improve modelling accuracy, and strengthen cyber defenses across financial institutions, Xinhua news agency reported.

Regulated entities are expected to manage AI-related risks within existing frameworks, and regulations must evolve to keep pace with technological change, RBNZ said, adding it will continue monitoring AI developments and regulatory responses to ensure the financial system remains robust in the face of innovation.

/IANS