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AI and Generative AI have the potential to really change productivity and generate a super economic cycle. For the European financial services industry, it will be a challenge because historically the US and Asian financial institutions have benefited the most from the new technology

Higher for longer interest rates tend to slow the economy, which will challenge banks and insurance companies and spur them to seek growth opportunities. That will include generative AI, which has the potential to generate an economic super cycle.

Watch more from the New Monetary Order Video Series and discover how financial institutions are adapting to the evolving monetary landscape.

The New Monetary Order has been beneficial to banks and insurance companies to date. Banks have benefited from a quick repricing of loans that have outgrown the pricing of the deposits, while insurance companies can benefit across solvency and profitability from higher rates.

But this is one side of the coin, the other is that we know that higher inflation and higher rates tend to translate into lower growth. So, I guess the biggest challenge for banks is to keep a close eye to the cost of risk, ensuring that they monitor the risk that they already have in the balance sheet, and that they allocate the new credit to sectors that can grow in the economy.

The second challenge for banks and insurance companies is to keep the cost base under control. This is mostly due to inflation, but also to the impact that AI and the new digital economy can have on their cost base.

For banks, strategies that will support real economic growth will play a major role in the near future. There are many opportunities: the financing of the climate transition, the financing of the digital revolution, and even the "S" of ESG can provide huge opportunities for banks.

For insurance companies strategies that will help mitigate the new and emerging risks, such as cyber risk, catastrophe risk, and even the new geopolitical risk, can play a major role in the near future. Implementing those strategies would require a much closer interaction between the public and the private sectors because banks and insurance companies on their own will not be in a position to fully implement those strategies. The NextGen EU is an example of a virtuous cooperation between public and private.

AI and Generative AI has the potential to really change the productivity of the entire industry and generate a super economic cycle. For the European financial services industry, it will be a super challenge because historically it has been the US and the Asian financial institutions that have benefited the most from the new technology. So, something will need to change this time in order for Europe to capture the full benefit from AI and Generative AI.