New AI Tool Predicts When A Bank Should Be Bailed Out To Prevent Losses
Artificial intelligence's scope is wide, with potential applications in almost all industries. But could AI's predictive powers be used to fix money-related crises before they materialise?
A new artificial intelligence tool could help governments decide whether they should bail out a bank in crisis. It does so by predicting if government intervention would save taxpayer money in the long run.
The AI tool was developed by researchers at University College London (UCL) and Queen Mary University of London. It can not only assess if a bailout is the best strategy for taxpayers, but also suggests how much ought to be invested in the bank. At any given time, it can tell which banks should be bailed out.
An AI algorithm of its kind
To test the algorithm, its creators used data from the European Banking Authority. Researchers tested the algorithm on a network of 35 European financial institutions considered intrinsic to the global financial system.
Even then, national banks with extensive proprietary data (that is not accessible by the public) may use it to ascertain use value that is case-specific.
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In a press release, Dr. Neofytos Rodosthenous (UCL Mathematics), corresponding author of the paper said: "Government bank bailouts are complex decisions that have financial, social, and political implications. We believe the AI approach we have developed can be an important tool for governments, helping officials assess specifically financial implications ¨C this means checking if a bailout is in the best interest of taxpayers, or whether it would be better value for money to let the bank fail. Our techniques are freely available for banking authorities to use as tools in their decision-making process."
In a bank bailout, a government investment can increase a bank's equity, thereby reducing its risk of defaulting. This short-term cost is considered justifiable to taxpayers if losses are curbed in the long term.
For their study, researchers used a mathematical control process called "Markov Decision Process" that took into account the effects of a government intervention, on top of this AI's ability to predict the length of a financial crisis and more.
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A bespoke AI algorithm assessed "optimal bailout strategies, comparing no intervention to different types of intervention." The researchers found that government bailouts only work if taxpayers' stakes in the banks are greater than a critical threshold value. "The optimal policy drastically changed once the percentage loss had gone above this threshold," the press release said.
The research also found that once a bank had received a bailout, it would be in the best interests of taxpayers for the government to continue investing in that bank to prevent default.
What do you think about the predictive powers of artificial intelligence? Let us know in the comments below. Details from the study were laid out in a new paper published in the journal Nature Communications on Thursday.??
For more in the world of?technology?and?science, keep reading?Indiatimes.com.?
References
AI tool predicts when a bank should be bailed out. (2022, November 17). UCL News. https://www.ucl.ac.uk/news/2022/nov/ai-tool-predicts-when-bank-should-be-bailed-out
University College London. (2022, November 17). New Artificial Intelligence Tool Predicts When a Bank Should Be Bailed Out by Taxpayers. https://scitechdaily.com/new-artificial-intelligence-tool-predicts-when-a-bank-should-be-bailed-out-by-taxpayers/amp/
