This paper explores the potential transformative impact of artificial intelligence (AI) on the financial sector, focusing on operational efficiency, risk management and customer experience in banking and insurance. It delves into the widespread adoption of AI technologies including generative AI (gen AI) and examines the associated risks and regulatory implications. While AI exacerbates existing risks such as model risk and data privacy, it does not introduce fundamentally new risks apart from gen AI, which may give rise to hallucination and anthropomorphism risks. Most financial authorities have not issued AI regulations specific to financial institutions as existing frameworks already address most of these risks. Nevertheless, some areas require further regulatory attention, including governance, expertise and skills, model risk management, data governance, non-traditional players in the financial sector, new business models and third-party AI service providers.

JEL classification: C60, G29, G38, O30

Keywords: artificial intelligence, machine learning, corporate governance, risk management, risk modelling