Fed’s Bowman Says Tailored AI Supervision Drives Financial Inclusion

Federal Reserve supervision should not hinder banks’ implementation of artificial intelligence (AI), because the technology can contribute to financial inclusion, Federal Reserve Vice Chair for Supervision Michelle W. Bowman said Tuesday (July 14).

In a speech delivered via pre-recorded video to the Fed’s Financial Inclusion Conference, Bowman said AI can expand the availability of credit to those who are unbanked or underbanked by enabling financial institutions to further refine their understanding of creditworthiness.

At the same time, the use of AI in a way that has a more direct impact on credit decisions regarding individual customers presents legal compliance challenges, Bowman said.

“So, our goal must be to support responsible AI innovation,” Bowman said. “That starts with greater clarity on what level of oversight is appropriate for different AI applications.”

For example, the Fed’s supervisory guidance should not hinder smaller banks from innovating and providing modern technology to their customers; should allow banks to implement AI in a way that is consistent with their unique business; and should be calibrated in the cases of lower-risk uses of AI, Bowman said.

“Financial institutions should leverage their existing risk-management frameworks, adding appropriate enhancements and controls tailored to the specific risks that each AI application presents,” Bowman said.

Bowman said during the speech that she has prioritized work on AI in her role as chair of the Financial Stability Board’s Standing Committee on Supervisory and Regulatory Cooperation.

The FSB published a report that examines financial institutions’ responsibilities around the potential benefits and risks of AI, and the organization is seeking public comment on the report through July 22, Bowman said.

When announcing its publication of the consultation report in June, the FSB said in a press release that the report offers financial institutions sound practices for AI governance, the management and mitigation of AI risks, and the management of AI-related technology and third-party risks.

Bowman said during her Tuesday speech: “That report also reflects our broader commitment of maintaining an ongoing dialogue between bankers and supervisors to ensure our approach keeps pace with innovation while safeguarding safety and soundness. We have been engaging with banks on AI for nearly a decade, and as use cases expand and technology evolves, that conversation becomes even more important.”

The PYMNTS Intelligence report “Financial Services Pulls Ahead in the Enteprise AI Race” found that the financial services sector has embedded AI into revenue recognition, credit scoring and sales forecasting.

“Financial services firms appear to have chosen to deploy AI when outcomes are certain and the consequences of error are manageable,” the report said.