the functioning of our financial system in at least three areas : products, processes and analysis. this is true for both front office functions ( eg customer business, trading ) and back office functions ( eg executing trades, risk management, market research ). special - purpose ai can solve specific problems, eg in customer engagement, financial management or cybersecurity. applications focused on market operations cover various core areas eg trading, portfolio composition, backtesting and validation of models, market impact analysis, modelling trading of large positions and stress testing. dynamic portfolio adjustment, depending on the macro environment, may be strengthened by ai. with the help of ai, various human shortcomings in dealing with finance can be mitigated. as behavioural finance has taught us, biases, inertia and ignorance lead to the malfunctioning of markets. ai allows humans to reach out beyond their intellectual limits or simply avoid mistakes. 1 / 4 bis central bankers'speeches 2 … but beware of the risks but opportunities are always accompanied by risks. as regards the financial system, if too much trust is put in “ intelligent ” systems, the stability of financial markets may be at stake. the workings of ai can be a mystery ; it can trigger loss of control, make fatal errors, and have a procyclical effect due to its mechanistic functions. pattern recognition has its limits. this can be dangerous particularly in crisis scenarios. an autopilot would never have been able to land a jet on the hudson river. nor can algorithms stabilise in periods of financial stress. looking at the recent turbulence in equities and the market for vix - related financial products, it can be concluded that the events of 5 february share many similarities with a “ flash crash ”. unfortunately, as with the original flash crash of may 2010, we have only limited knowledge about the direct drivers that triggered the event. it can be assumed that algorithmic market participants were quite active during the relevant period. but as to which strategies were applied and to what effect, we have no knowledge so far. the rise in volatility in the s & p 500 then nearly instantly affected the vix industry, making it not the cause but more the first victim of this market event, with losses up to 95 % on assets. we do not expect this phenomenon to disappear in the future. on the contrary, more of these flash events are to come. ai is still in its infancy

##udential policy in new zealand drew on international policy insights from the financial cycles that preceded and succeeded the gfc. governments became more concerned about the financial stability risks associated with credit and asset price cycles and introduced new counter - cyclical ” macro - prudential ” policy measures to lean against emerging risks. a macro - prudential policy framework was agreed between the reserve bank and the minister of finance in may 2013. new policy frameworks present policy challenges in building understanding of their objectives and operation. faced with accelerating house price inflation on top of already over - valued house prices, the bank moved quickly to introduce new policy measures, including new capital requirements against high loan - to - value ratio ( lvr ) lending and limits on the share of new high lvr lending that banks could undertake. the challenge confronting the bank was the risk of not achieving its financial stability outcome goals if it failed to act ( with potentially very severe consequences ) vis - a - vis the risks to the bank ’ s reputation and confidence in its policy - making. there were risks and uncertainties to manage in introducing an important policy innovation that was new for households and banks. a classic risk - reward trade - off – one that required significant evaluation and preparation by senior management. several steps were taken to ameliorate possible downside risks. we set the scene for these measures in a number of on - the - record speeches and in remarks at press conferences, and in monetary policy statements and official cash rate statements expressing our concerns with easier lending standards and house price inflation. we consulted with banks and published analyses of the potential impact of the measures, as well as comparisons with regimes in other countries. following their introduction, we provided assessments of the impact, rationale and objectives in further speeches, media interviews, and in the november 2013 and may 2014 financial stability reports. the introduction of lvr restrictions has attracted commentary from different quarters. in some commentators ’ eyes, there has been a blurring of financial stability and monetary policy objectives, with some analytical debate about the merits of the policy. others have questioned the bank ’ s operational policy design and its distributional impacts. some have credited the bank with policy innovation and the willingness to act before a crisis eventuates. to date, the impacts have been broadly in line with the bank ’ s expectations. house price inflation is moderating, along with the risks to financial stability ( fsr, may 2014 ). 2. operational risks relate to the achievement of business plans and