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    • Decoding the US regulatory landscape for AI adoption in banking: by Karla Booe
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    Decoding the US regulatory landscape for AI adoption in banking: by Karla Booe

    Umito Posted on

    Artificial intelligence (AI) has been used in banking for decades. AI-assisted decision-making, machine learning-based automation, and chatbots are all here and have found their place in making the banking industry more efficient and scalable.

    What has changed is the sophistication of our computing power and, of course, the AI ​​generation.

    The year 2023 saw a series of AI-focused educational briefings in the U.S. Senate, including one classified briefing for all senators and nine briefings.
    AI Analytics Forums. In December 2023, the Financial Stability Oversight Council highlighted AI as an emerging risk, underscoring the seriousness with which regulators are treating this technology.

    Congress considers AI a national security risk, and no regulations have been introduced by banking regulators specific to AI. Additionally, there is a clear focus on establishing frameworks for how AI systems should be designed and what security guardrails should look like. These frameworks should be integrated into all AI adoption strategies within financial institutions.

    Some common themes are also emerging around consumer protection and data privacy that can inform best practices for AI-enabled products or services. In this blog, I highlight what financial institutions can adopt from the available frameworks and guidance, as well as some ideas on how the U.S. approach to AI regulation compares in direction to that of Europe.

    Regulating AI Adoption in Banking: What We Know

    As AI use cases evolve from simpler to more complex tasks, bankers and banking regulators are concerned about business risks. A 2024 survey of 127 U.S. banking industry professionals found that 80% expressed concerns about the potential for bias in general AI models and therefore in decision-making; 77% on degradation customer trust and transparency; 73% on exposing customer data or providing a point of vulnerability to cyberattacks.

    Similar concerns appear in regulations discussed during legislative sessions. Congress has already presented
    40 AI-related bills in 2024focusing primarily on common themes to ensure that AI is used responsibly and safely across the country. The following themes are relevant to the financial sector and corresponding regulatory developments in the United States:

    Privacy and data protection: Banks and credit unions hold a trove of personal data, and there are increasing efforts to ensure this data is properly protected. Congress’ latest efforts lay the groundwork for what could ultimately lead to a national privacy law in the United States – a development that has been years in the making.

    The Biden administration further emphasized this need with an executive order at the end of 2022, alongside the unveiling of the
    AI Bill of Rightswhich serves as a guide to protecting privacy and civil rights while ensuring that AI tools are fair and accurate.

    Transparency and efficiency: For banks and credit unions, the most immediate concern comes from the Consumer Financial Protection Bureau (CFPB). Their recent interest in chatbots highlights the potential pitfalls of AI in customer service, including deceptive practices and customer frustration. Financial institutions deploying AI-based chatbots must therefore be particularly vigilant when it comes to transparency and efficiency.

    Responsibility: Holding AI systems accountable is a top priority, especially in sensitive areas like credit scoring. The aim is to protect against bias and discrimination, ensuring that AI decisions are fair, transparent and equitable. Specifically, financial institutions must consider a broader range of regulatory implications when implementing AI:

    Third-party risk assessment: Perhaps most importantly, regulators are emphasizing third-party risk management. As banks increasingly rely on external AI providers, robust monitoring and risk mitigation strategies for these partnerships are essential.

    Regulatory guidance: comparison with European AI law

    The European Union set the global tone with its AI law, which is recognized today as the most comprehensive AI framework. This legislation aims to regulate high-risk AI systems, with a particular focus on the banking sector. The AI ​​Act classifies AI applications by level of risk and imposes strict rules to ensure transparency and accountability. The EU AI law is expected to have the greatest impact globally due to the size of the European market and its extensive reach into other parts of the world.

    From a directional perspective, the current US approach differs from that taken by the EU in the following ways.

    Globally, the challenge for each region will be to keep up with rapidly evolving technological developments and harmonize risk management across borders.

    Future outlook

    Looking ahead, several trends are likely to shape the future of AI regulation in banking in the United States:

    • Harmonization of standards: There will probably be a push to harmonize AI cross-border regulations, making it easier for banks to operate globally. Organizations like the Global Partnership on Artificial Intelligence (GPAI) could take the lead in creating a unified approach to AI oversight.

    • Explainability and transparency: Future regulations should emphasize the need for explainable AI. In banking, this means that AI systems will need to be crystal clear about how they make decisions.

    • Ethical AI Frameworks: More emphasis will be placed on ensuring that
      AI is used ethically in banking. This means developing frameworks to avoid bias and ensure AI systems align with societal values ​​and norms. This will include frameworks to ensure non-discrimination, fairness and the protection of human rights.

    Conclusion

    AI is rapidly transforming the banking industry and regulatory frameworks must evolve to keep pace. By staying ahead of these trends, banks and other stakeholders can navigate the complexities of AI regulation and unlock its full potential. The key to success is the balance between rigorous compliance and a spirit of innovation.

    Umito
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