Banking watchdogs ramp up AI scrutiny as stability fears mount Regulators in the US and Europe are intensifying their scrutiny of artificial intelligence (AI) as concerns over financial stability grow. They are quizzing banks about their use of advanced AI models, including their deployment of Chinese-developed technology and the use of AI agents in cyber defence. The regulatory scrutiny reflects a growing recognition that advances in frontier AI may require costly investments in cyber recovery and greater attention to dependencies on external technology providers. Banking watchdogs are intensifying their scrutiny of artificial intelligence (AI) as concerns over financial stability grow. Regulators in the US and Europe are quizzing banks about their use of advanced AI models, including their deployment of Chinese-developed technology and the use of AI agents in cyber defence. The regulatory scrutiny reflects a growing recognition that advances in frontier AI may require costly investments in cyber recovery and greater attention to dependencies on external technology providers. In the US, regulators, including the Federal Reserve, are probing banks about their use of agentic AI in areas such as cybersecurity.Regulators Focus On AI Agent ControlsThey are focusing on whether AI agents are being used to identify, prioritize and respond to threats, as well as the limits placed on systems, how their actions are monitored and approved, and whether banks can clearly track and audit AI agent decisions. Regulators are also asking what safeguards exist to prevent agents from exceeding their authority, whether humans remain involved in key decisions, and how banks can shut down autonomous systems.In Europe, supervisors, including the Bank of England and the European Central Bank, are pressing banks to improve their recovery plans, concerned that rapid advances in AI could cause serious harm and disruption in financial markets sooner than previously feared. A senior executive at a large European bank has expressed concerns about the potential for major damage to banking and financial markets within six months.The debate over AI oversight has intensified amid warnings from the industry after recent incidents, with JPMorgan CEO Jamie Dimon urging corporate leaders to join a US-focused industry group to address AI risks. The industry has also been warned about the potential for rogue AI agents to pose an existential threat, prompting calls for stricter regulation.Banks Grapple With AI Adoption ChallengesBanks are competing to adopt agentic AI, which can accomplish tasks with minimal human supervision, while also grappling with the challenges of new models, including IT weaknesses flagged by Anthropic's Mythos tool. The adoption of AI is often outpacing the ability to put the controls in place, says Michael Woodbridge, a cybersecurity partner at Grant Thornton.Regulators are still gathering information and are not yet being prescriptive about what lenders should be doing, but the inquiries show that they are focusing on vulnerabilities from banks' use of AI and their preparedness to act. Supervisors in Britain are separately encouraging the largest banks to examine so-called bare metal recovery plans, which are entirely independent from a bank's main tech set-up and can kick in if primary operating systems are compromised.ECB Sets Deadline For AI Cyber PlansThe ECB in July gave lenders an end-October deadline to produce plans to counter AI-enabled cyber threats, including improved back-up and recovery. The ECB referred to its July letter as well as a June speech by board member Frank Elderson who stressed the need to create a sense of urgency, not alarm, about the threats.