AI risks are the biggest threat to the financial system, Fed survey finds

Threats from artificial intelligence topped the list for greatest risks to the financial system, far exceeding any other dangers, according to respondents who participated in a Federal Reserve survey released Friday.

The central bank's twice-yearly look at a variety of dangers saw a surge in respondents saying that the biggest danger comes from AI along several fronts including debt, stock market valuations and security risks.

"Respondents noted three distinct areas of concern: (1) elevated equity valuations and the possibility that lower-than-expected earnings could result in lower valuations and a market correction; (2) cybersecurity risk, stemming from either a malicious attack by sophisticated state actors or damage caused by frontier AI models themselves; and (3) risks associated with complex forms of AI-related financing," the report stated.

The report comes with Wall Street on edge over high-flying AI hyperscalers, while communities are on alert for the rapid spread of data centers used to power the technology. Some 56% of voters in this month's midterm elections said data centers were of crucial or major importance in their choices, according to exit polling.

Respondents to the Fed survey released Friday include a variety of market participants, economists, analysts and institutional sources. The report covers the period up to Oct. 28, just a few days shy of the election.

Of the group, 87% cited AI as a "salient risk" to the system. That was up from 50% in the survey during the spring of this year and well ahead of the next most-cited danger, a risk asset correction, which was mentioned by 52% of those surveyed.

Other leading risks were higher long-term rates (48%), cyberattacks (43%) and fiscal debt sustainability (43%), the latter coming with the U.S. debt over $40 trillion and the budget deficit near $2 trillion.

The report otherwise found the system fairly stable, though it mentioned that hedge fund leverage is at its highest since 2013 and concentrated on a relatively small group.