3 central banks warn AI outpaces financial regulation as risks mount

European central bankers say agentic AI is advancing too quickly for traditional financial regulation to contain the risks.

Three of Europe's top financial authorities warned this week that agentic artificial intelligence is outpacing regulatory frameworks, with 52% of finance firms already using autonomous AI systems that could amplify market volatility.

"Technology moves incredibly fast, and we need to think differently about some of the innovations that we are seeing on AI," Nikhil Rathi, chief executive officer of the UK's Financial Conduct Authority, told CNBC's Squawk Box Europe on Thursday.

Bank of England Deputy Governor Sarah Breeden said at the European Central Bank's annual forum in Sintra, Portugal, that agentic AI could amplify volatility during market stress, questioning whether guardrails are needed "analogous to circuit breakers or kill switches that would limit or stop trading market-wide if faulty AI models cause market meltdown." ECB President Christine Lagarde, in an interview with Les Echos, warned the technology poses a "major risk" as cybersecurity defenses and their funding have yet to catch up.

The coordinated warnings from the BoE, ECB and FCA — alongside the Bank for International Settlements and the International Monetary Fund — signal that regulators see a widening gap between AI deployment and oversight. The BIS warned June 28 that AI "exuberance" could trigger disruptive macro-financial feedback loops if central banks tighten policy to contain inflation, while IMF Director Tobias Adrian flagged a "potential maturity mismatch" between the duration of physical AI assets and the debt financing them.

The warnings come as US companies lead in AI investment and frontier model development, while Europe's bank-based financial system provides fewer capital channels into the sector. Regulating too cautiously could widen that gap further, as AI companies may seek jurisdictions with lower compliance requirements, officials acknowledged.

A Cambridge Centre for Alternative Finance survey found 52% of finance firms already use agentic AI — systems that can make decisions and operate autonomously. In trading, firms currently deploy autonomous AI mainly for lower-risk operational tasks such as research, Breeden said, but "that could change quickly."

"If AI agents respond similarly to the same prompts or triggers, they could amplify volatility in stress — especially if their objectives drift from original goals or public policy objectives," she said.

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Breeden said debt financing for AI-related assets was rising rapidly. "We therefore judged that the financial stability consequences of any fall in AI-related asset prices could well increase," she said. The BIS echoed that view, warning that a sharp pullback in AI asset prices after a prolonged period of exuberant risk-taking could trigger disruptive macro-financial feedback loops.

Rathi said the FCA is exploring new tools and a more collaborative approach with the market to address financial crime and AI risks, rather than relying on the traditional rulemaking cycle. "The reality is some of these technologies now move in weeks, or months, and the traditional cycle of rulemaking simply doesn't work in that way," he said.

The ECB's Lagarde said the acceleration and deepening of AI models confronts regulators with a much more serious risk than previous cybersecurity threats, "because it is happening very, very quickly, and because the means of defense — and the funding required for them — have yet to be found."

This article is for informational purposes only and does not constitute investment advice.