April 13, 2017
Bank of Japan
AI and the Frontiers of Finance
Remarks at the Conference on
"AI and Financial Services/Financial Markets"
Haruhiko Kuroda
Governor of the Bank of Japan
Introduction
Today's conference focuses on the overlapping areas of new information technology,
such as artificial intelligence (AI) and financial services, which now constitute the
frontier of finance. Indeed, the fact that experts in various fields are gathering in this
meeting room of a central bank symbolizes the current trend in finance.
I. AI, Big Data Analytics, and Finance
Information processing as a basic function of financial services
Today, concepts such as AI and big data analytics are seen ubiquitously on the news and
in magazines. These new information technologies have been utilized in the marketing
of consumers' attribute analysis and applied in various areas such as system control,
bio-medical sciences, economic analytics, and weather forecasting.
The financial field is also attracting significant attention as promising areas in which AI
and big data analytics are expected to explore new frontiers. Indeed, various measures
have been taken to utilize these technologies in a wide range of financial businesses,
such as providing innovative services called "FinTech," high-tech oriented trading in
various markets, risk management, and the operation of call centers for retail customers.
It is not at all surprising that such new information technologies are expected to be
utilized in various financial services, considering that the basic function of finance is
information processing.
Financial infrastructure, including financial markets and payment systems, efficiently
processes large amounts of information. For example, it is impossible for a single
individual to assess the risks and returns of a vast number of projects spreading all over
the world. In financial markets, the assessment of projects by many market participants
are aggregated and shared in the form of "price," where each participant is able to use
the assessment made by many other participants. In this way, financial services, through
efficiently processing large volumes of information, continuously allocate limited
economic resources to promising projects, thereby supporting economic development.
In this respect, AI and big data analytics is considered to have a great potential for
making the information processing function -- which is the fundamental function of
finance -- even more efficient and advanced, as they enable to generate new value added
through processing large volumes of information.
Further data utilization
Another motivation for applying AI and big data analytics to various financial services
is that finance activities generally accompany large data volumes, which have great
potential to be utilized in wide-ranging businesses.
For example, if transaction data associated with payments and settlements -- in terms of
"who bought what, when, and where" -- could be collected and analyzed, such data
would have significant value for various businesses. In this circumstance, recent
innovation in information technology and consequent business developments, such as
the popularization of loyalty cards, have made it even easier to collect and analyze big
data related to payments and settlements.
Response to changing environment
The third source of motivation for applying AI to financial activities is that the
environment surrounding financial markets and services continuously changes,
reflecting the complex mutual interactions of various factors.
For instance, financial markets do not always show similar responses to similar news.
Financial markets of today may strongly react to the news it did not react to at all
yesterday. The risks and returns of various projects, as well as the needs of financial
service users, change from day to day in accordance with the changes in the economic
environment. AI is expected to support efficient responses to changes in the
environment surrounding market transactions and financial businesses by swiftly
providing guidance based on the analysis of large volumes of new information observed
in economy and markets.
II. New Issues
Impact on market structure and price formation
Although AI and big data analytics are expected to provide multiple benefits, new issues
have been identified for market stakeholders and policymakers when applying such
technologies to financial activities.
High-frequency trading (HFT) and algorithmic trading, which use high-speed
communications and computer programs, have already been employed in financial
market transactions. There are arguments that these types of trading improve market
liquidity. At the same time, there are also concerns that HFT and algorithmic trading
may increase market volatility, especially if massive trading is based on a similar
algorithm, or that a possible exiting of market participants who cannot employ HFT
would ultimately reduce its diversity. As such, the application of AI and big data
analytics to HFT and algorithmic trading might intensify these negative impacts. In
view of these various opinions, policymakers should carefully monitor the impacts of
possible application of new information technologies on market structure and price
formation.
Ensuring "information security" and "data privacy"
As previously mentioned, one of the motivations for applying AI and big data analytics
to financial services is the potential benefits obtained through effective and efficient use
of data associated with financial activities. This implies that information security and
data privacy would be even more critical in providing financial services. In this respect,
the sincere efforts of stakeholders would be key to ensuring users' trust in innovative
financial services utilizing new information technologies, and promoting the
developments of such services.
Ensuring "trust" and "governance"
There is also concern voiced about whether the extensive application of AI might take
financial market infrastructure beyond the control of human beings. Such a concern
might be based on human beings' ambivalence toward AI, which was elegantly
described in "2001: A space odyssey," a film released almost half a century ago. The
reason why such concern arises in the application of AI to financial services, is probably
because "trust" is a critical factor in financial services, along with several other sectors,
such as medical services.
Although we already have highly intelligent and skilled robots, few individuals
welcome, without hesitation, undergoing completely robotic surgeries without any
human intervention, as we cannot completely get rid of tail risks. To facilitate the
application of AI to financial services, it would be important for relevant entities to
establish reliable structures for effective governance and responsibility in case of tail
events to ensure public trust to innovative financial services.
III. AI and the Frontiers of Finance
Keeping these issues in mind, new information technologies such as AI and big data
analytics have the potential to broaden the frontiers of finance and contribute to the
economy.
Ever since the creation of money, finance has continuously developed through utilizing
available technologies such as minting, printing, telecommunication, and computers.
For instance, securities were originally based on paper and printing technologies.
Although the developments in information technology have replaced paper securities
with digital signals, the securities market continues to contribute to the economy. Rather,
as securities have been dematerialized by digital signals, their market has further
developed, since dematerialization freed securities from geographical limitations. Now,
advanced securities markets have become a core financial infrastructure, linking the
supply and demand of funds not only domestically but also across borders.
In the economy, finance functions to connect various economic entities, wide-ranging
goods and services created by them, as well as investors and projects beyond time and
space. I believe such a function of finance will become more important in view of
globalization and technological innovation. Since AI and big data analytics enable
advanced information processing, they inherently have the potential to strengthen the
functions of finance. For example, they could contribute to the growth of the global
economy through matching investors and projects worldwide more effectively, and
increasing the number of projects to be carried out. Additionally, new information
technologies would enable financial service providers to offer more personalized and
customized services to users, thereby increasing economic welfare.
In view of such potential benefits of new technologies to the economy, public
authorities, including central banks, should be cautious not to deter the development of
new information technologies by focusing solely on their negative side effects. We,
policymakers, should always try to maximize the benefits of new technologies while
minimizing their negative impacts, and I firmly believe we can do so by taking the
appropriate actions.
Moreover, it is also essential for us to constructively consider desirable ways in which
humans and AI complement, rather than confront, each other. For instance, human
judgment is not completely free from existing paradigms, and thus is sometimes
negligent to changes. In this regard, AI could adjust our bias by neutrally analyzing and
finding new correlations among a myriad of data. Meanwhile, humans could
compensate for AI's weakness with their intuition, common sense, and imagination.
IV. Concluding Remarks
When I think about AI and human beings, I think of Blaise Pascal, a French philosopher
and mathematician of the 17th century, as the forerunner who expressed advanced ideas,
such as automated processing of large numbers of data and innovative algorithm, which
took the lead in developing today's information technology. Almost 400 years ago,
Pascal invented the first computing machine, an ancestor of today's computers. Pascal
also came up with an idea of an omnibus coach as the first public transportation in the
world. This was based on an algorithmic idea to efficiently transport many people by
establishing routes that crisscrossed and surrounded the city of Paris. This should have
been a much more epoch-making idea in those days than today's idea of car-sharing.
At the same time, Pascal emphasized the importance of independent thinking for human
beings in his famous phrase: "Man is a reed, the weakest of nature, but he is a thinking
reed." I believe this phrase has great implications for us in dealing with new
technologies.
If there is any risk the role of human beings are overwhelmingly replaced by AI, that
would be when human beings stop thinking independently and autonomously. From a
financial perspective, it is most important for us to think independently and positively
on how to make an efficient and effective use of new technologies such as AI and big
data analytics to further develop and improve financial markets and services.
From this viewpoint, today's conference is a great opportunity, where numerous experts
with various backgrounds gather to discuss the most advanced issues in finance, such as
the interactions between AI, financial services, and markets.
I would like to close by hoping that today's conference will generate fruitful discussions,
and that the exploration of financial frontiers by utilizing new information technologies,
including AI, will greatly contribute to the development of the economic society.
Thank you for your attention.