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AI push is putting banks at mercy of tech firms, warns Moody’s
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- DeepHorus
Moody's has warned that the financial sector's rush to adopt AI is creating a dangerous overdependence on a small group of Silicon Valley firms, leaving banks vulnerable to widespread outages and price gouging. The rating agency said AI will eventually cut costs and increase revenues across the City and Wall Street, but that will require substantial investments. With so many rivals pursuing the same goal, many of those benefits will end up being competed away. AI also raises risks around data privacy, cybersecurity, fraud, and deposit flight.
More than 75% of City companies now use AI, according to a UK Treasury select committee report published in January. Insurers and international banks are among the biggest adopters, mostly using AI to automate administrative tasks or support core operations like processing insurance claims and assessing customers' creditworthiness. The reliance on a relatively small set of foundation AI model and cloud computing providers risks creating a systemic dependency, Moody's said. A model outage at one major provider could spread quickly across customers and sectors.
The AI race also creates vendor dependence risk, meaning dominant providers could exert control over the price of AI services over time. This issue is likely to emerge as loss-making generative AI companies, including OpenAI and Anthropic, come under pressure to deliver profits for investors. While this poses credit risks, Moody's noted that financial firms retain control over key assets, including proprietary data. Many banks and insurers also have experience negotiating tech contracts and may use open-source models to offset dependency risks.
Lloyds Banking Group's chief executive, Charlie Nunn, recently doubled down on AI investment with a £13bn strategy involving technology to lure new business, improve efficiency, and increase shareholder payouts. That includes £2bn of cost cuts, which Nunn said would affect staff. He acknowledged the need to reskill people and hire new ones, citing his 30 years in financial services.
Moody's also acknowledged potential job displacement, giving a 20% chance that by 2030 AI could perform the work of a solid mid-level employee. Additionally, AI might make it easier for customers to switch accounts for higher interest rates, creating the possibility of rapid deposit flight. Depositors' trust and the resilience of deposit funding are critical, Moody's concluded. Regulators may increase oversight of operational resilience and third-party concentration as AI adoption deepens.
