Artificial Intelligence

Understanding how Artificial Intelligence can mitigate and forestall a financial crisis.

The current COVID-19 situation has alerted the world about the impending global financial crisis that we may face at the starting of this decade. It also reminded us of the Great Depression, triggered by the Wall Street crash of 1929 and last till 1939, and economic meltdown of 2007-2008 which was caused due to the collapse of Lehman Brothers (one of the biggest investment banks in the world). While such seismic scale emergencies on the economic front are rare, the financial crisis is always unfortunate. This is why experts and leaders are looking for solutions using modern technologies like artificial intelligence (AI) to mitigate any future occurrences. Since most of these financial crises happened because of stock market crashes and loosened credit lending standards, AI can play an instrumental role in the early forecast of potential market crashes and detecting faulty lending standards.

What went wrong?

The COVID-19 pandemic provided an inflection point for AI that resulted in speeding the adoption of this transformational technology. When the world first felt the tremor of a global health emergency, governments and central banks rallied to avert a financial crisis that was predicted to be worse than the 2008 meltdown. Overnight, banks began cutting interest rates near zero, most of the loans repayment deadlines were extended, injecting liquidity into the system for seamless cash flows, with quantitative easing allowing central banks to buy government bonds or other financial assets. However, this was not a long term solution to maintain economic balance. Hence, major industry experts and financial institutions turned to harness AI technologies to discover ways to counter this, thus kicking it into a hyperactive state.

How AI can Help?

The major causes of any financial crisis can be studied from the existing historical data. Some of these include imprudent mortgage lending, lack of transparency and accountability in mortgage finance, housing bubble, unsteady financial flows, shadow banking system, deregulatory legislation, failure of risk management systems, credit default swaps (CDS), over-the-counter derivatives and so on. AI and data analytics can help us have a better understanding of where risk occurs in the business and use financial data to identify critical trends in revenue and expenditures. By collecting market trends data such as stock prices, trades, and demand AI can forecast rise or freefall of shares in the stock market, providing investors an optimal window for investment and instances they need to avoid to prevent losses. AI can also help in making recommendations of loan and credit offerings to suitable candidates based on the data collected. AI, subset machine learning can help in monitoring digital footprints, income, and social media activities of people who apply for loans. In doing so, machine learning algorithms can provide accurate credit scores. This can help banks and other financial institutions to determine who will be able to repay their debts and who won't. Lastly, it can also help with decision-making for financial advisory services.

Uptake

While AI is undoubtedly future for the finance industry and can play a crucial role in preventing the next financial crisis (like that of 2008, or earlier), it is currently in a juvenile state. However, with repeated training of machine learning models and careful programming, it will soon be a possibility and an indispensable asset. COVID-19 is just an instigator here.