For the first time, the Financial Stability Oversight Council in its annual report identified artificial intelligence as a vulnerability in the U.S. financial system.

The council said financial institutions, market participants and regulatory authorities should further build expertise and capacity to monitor AI innovation and usage, and identify emerging risks.

“AI has the potential to increase efficiency and innovation, but it also introduces certain risks,” the council said in its report released Dec. 14. “Monitoring these rapidly emerging technologies will continue to be increasingly important, given the potential risks and benefits of their use in the financial services system.”

Among the risks AI poses, the council said without proper design, testing and controls, the emerging technology can lead to “disparate outcomes, which may cause direct consumer harm and/or raise consumer compliance risks.”

Treasury Secretary Janet L. Yellen, who chairs the council, said in prepared remarks on Dec. 14 that supporting responsible innovation in this area “can allow the financial system to reap benefits like increased efficiency, but there are also existing principles and rules for risk management that should be applied.”

The council, which was established in 2010 under the Dodd-Frank Wall Street Reform and Consumer Protection Act, is charged with identifying risks to the financial stability of the U.S.; promoting market discipline; and responding to emerging threats to the stability of the U.S. financial system. It is made up of financial regulators, including the leaders of the Federal Reserve, Securities and Exchange Commissions, and the Commodity Futures Trading Commission.

In total, the council in its report highlighted 14 different vulnerabilities to the U.S. financial system, including cybersecurity and climate-related risk.

With respect to climate, the council said climate-related impacts and events continue to impose significant costs on the public and the economy.

“Financial regulators should continue to promote consistent, comparable, and decision-useful disclosures that allows investors and financial institutions to better incorporate climate-related financial risks in their investment and lending decisions,” the council said in its report.

Though SEC Chair Gary Gensler, who sits on the council, did not mention it in his prepared remarks Dec. 14, his agency unveiled a climate disclosure proposal in March 2022. The rule, which has broad backing from institutional investors and asset managers but stiff opposition from the business community and Republican officials, would require public companies to provide a host of climate-related information in their periodic reports and registration statements.

The SEC is aiming to unveil a final climate disclosure rule by April, according to its latest regulatory agenda.