N°26-25: AI Disclosure and Bank Stability

Does artificial intelligence (AI) make banks more or less stable? Using annual-report disclosures of major listed Chinese banks from 2013 to 2024, we find that banks disclosing more AI are subsequently less stable. Within banks, a one-standard deviation increase in AI disclosure predicts a Z-score, a measure of distance to insolvency, about 20% lower in the following year, a statistically significant and economically meaningful decline. The relation holds when related technologies are controlled for and is not mirrored by general digital technology disclosure. Decomposing the Z-score, we find that the association runs through greater earnings volatility, accompanied by lower profitability, with weaker evidence for capitalization. The relation is strongest when asset quality is weak and attenuated when provision coverage or net interest margins are high. Our results suggest that the stability benefits of bank technology adoption are not uniform and that AI disclosure may help supervisors identify earnings fragility.