Federal Reserve Board Vice Chair for Oversight Michelle W. Bowman said Tuesday (July 14) that bank supervision should not prevent banks from adopting artificial intelligence (AI) because the technology can contribute to financial inclusion.
In a prerecorded video address at the Fed’s Financial Inclusion Conference, Bowman said AI can expand the availability of credit to the unbanked and underbanked by allowing financial institutions to better understand their creditworthiness.
At the same time, Bowman said using AI in a way that more directly impacts credit decisions about individual customers raises legal compliance challenges.
“Our goal must therefore be to support responsible AI innovation,” Bowman said. “It starts with gaining greater clarity about what level of oversight is appropriate for different AI applications.”
For example, the Fed’s supervisory guidelines should not prevent small banks from innovating and providing the latest technology to their customers. Banks need to be able to implement AI in a way that is consistent with their own business. Bowman said there should be adjustments for low-risk uses of AI.
“Financial institutions should leverage their existing risk management frameworks and add appropriate enhancements and controls tailored to the specific risks presented by each AI application,” Bowman said.
In his speech, Bowman said he has prioritized AI efforts in his role as chair of the Financial Stability Board’s Standing Committee on Supervisory and Regulatory Cooperation.
The FSB has published a report examining financial institutions’ responsibilities regarding the potential benefits and risks of AI, and the organization is seeking public comment on the report until July 22, Bowman said.
When announcing the publication of the consultation report in June, the FSB said in a press release that the report provides financial institutions with sound practices for AI governance, managing and mitigating AI risks, and managing AI-related technologies and third-party risks.
“This report also reflects our broader commitment to maintaining an ongoing dialogue between bankers and supervisors to ensure our approach keeps pace with innovation while protecting safety and soundness,” Bowman said in his Tuesday speech. “We have been engaging with banks on AI for nearly a decade, and that dialogue has become even more important as use cases expand and technology evolves.”
The PYMNTS Intelligence report, “Financial Services Advances in the Enterprise AI Race,” found that the financial services sector is incorporating AI into revenue recognition, credit scoring, and sales forecasting.
“Financial services firms appear to be choosing to deploy AI when the results are certain and the impact of errors is manageable,” the report said.
