Proper regulation of banking operations is important as any failure in the banking system would affect the wider economy. Therefore, banking is one of the most regulated industries across the globe. Financial regulators ensure that services to the customers go undisrupted so that they may not lose confidence in banks. They also make sure to assess banks’ soundness and robustness to face adverse situations and monitor subject banks’ decisions and operations. In general, regulators want banks to follow and subject to certain restrictions, requirements and guidelines to ensure transparency of relationships between banking firms and with individuals and corporates they are dealing in. Apt regulation would help banks reduce their risks resulting from credit decisions, adverse trading conditions, and misuse of banking services by criminals.
The 2008 global financial crisis has been a game changer for the global banking sector, which undertook a series of unforeseen measures, such as Basel III, to keep away with a possible similar situation. Having said that, the emergence of new technologies such as artificial intelligence (AI) and machine learning, which have compelling use cases in the banking sector, has caused serious confusion among regulators for a long time with regard to setting standards and policies for using them. Nowadays, some regulators have started realizing how artificial intelligence can help improve efficiency and effectiveness of banking operations. They have come up with new guidelines and policies to help augment the adoption of AI-enabled solutions to ease several tasks at banks. In this article, we are trying to list a few regulators who have been vocal and active about the use of AI at banks.
The Monetary Authority of Singapore (MAS)
Singapore’s central bank has been widely recognized for its efforts to create a framework to facilitate the use of next-generation technologies at banks for innovation. That was one of the reasons why MAS was named the Central Bank of the Year 2019 by London-based journal Central Banking. According to the journal, the bank looks to position Singapore as a leading global fintech hub and has set up its Fintech and Innovation Group in 2015 to “encourage innovation and the use of technology in the financial industry to enhance efficiency, reduce risks, and strengthen competitiveness”. Also, MAS introduced an S$27-million AI and Data Analytics grant to support the adoption and integration of AI and data analytics in financial institutions. The central bank’s encouragement for new technology can also found in its recently released Fairness, Ethics, Accountability & Transparency, or FEAT Principles for the responsible use of artificial intelligence and data analytics.
“As the financial industry harnesses the potential of AI and data analytics on an increasing scale, we need to be cognisant of using these technologies in a responsible and ethical manner. The FEAT Principles are a significant first step that MAS has taken with the industry.”- David Hardoon, MAS chief data officer
The US Financial Crimes Enforcement Network (FinCEN)
Banking regulators in the US had been skeptical of the use of artificial intelligence and ensured human supervision in critical applications. Sounding a major change of mind with regard to the use of emerging technologies, FinCEN, along with fellow regulators the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency, issued a statement on December 3, 2018. The statement encouraged banks to use modern-era technologies to bolster their Bank Secrecy Act/anti-money laundering (BSA/AML) compliance programs. The agencies ask banks “to consider, evaluate, and, where appropriate, responsibly implement innovative approaches to meet their Bank Secrecy Act/anti-money laundering (BSA/AML) compliance obligations, in order to further strengthen the financial system against illicit financial activity.” They are of the view that private sector innovation, involving new technologies such as artificial intelligence and machine learning, can help banks identify and report money laundering, terrorist financing and other illicit activities.
“Financial institutions have been improving their ability to identify customers and monitor transactions by experimenting with new technologies that rely on advanced analytical techniques including artificial intelligence and machine learning. Many institutions are also working closer together to share information to get a more accurate picture of risks and illicit activity. FinCEN encourages these types and other financial services-related innovation that advances the underlying purposes of the BSA to enhance financial transparency and to deter, detect, and disrupt financial and related crime; protecting our national security and keeping us safe.” - Kenneth Blanco, FinCEN Director
European Banking Authority (EBA)
In a July 2018 report, EBA said that banks can harness sophisticated technologies such as machine learning and distributed ledger system in the areas of robo advising, credit scoring, AML/CFT compliance and smart contracts, if implemented “appropriately, adequately and sufficiently”. The watchdog adds that these technologies could “bring new opportunities to institutions, which could potentially outweigh the risks, provided that it is accompanied by the establishment of effective governance structures as well as appropriate implementation and risk management processes. In addition, EBA’s FinTech roadmap for 2018/2019 looks to establish a FinTech Knowledge Hub to enhance knowledge sharing and foster technological neutrality in regulatory and supervisory approaches. At the same time, EBA warned that there can be potential risks for aggressive adopters of new technology if they don’t have “a clear strategic objective in mind, backed by appropriate governance, operational and technical changes”.
“Rigorous but proportionate policing of the perimeter, accommodative but safe sandbox regimes, and sharing of intelligence and best practice amongst supervisors and with market participants via a knowledge hub are the tools we will deploy in the coming years, in the attempt to achieve a proper balance.” - Andrea Enria, Chairperson of EBA
The Reserve Bank of India (RBI)
Recently, India’s top bank has proposed a regulatory sandbox framework to promote innovations in fintech, especially in the areas of block-chain, mobile technology, artificial intelligence, and machine learning, in the country, which is one of the fastest growing fintech markets in the world. Earlier, the bank has formed a unit to track emerging technologies like cryptocurrency, blockchain and artificial intelligence. Currently, the application of AI at Indian banks is confined mostly to front-office use cases such as chatbots. RBI’s report of the Working Group on FinTech and Digital Banking in November 2017 says: “Both Robotics and AI will help banks manage both internal and external customers much more effectively and help reduce operational costs exponentially in the future. The potential of AI and Robotics based solutions is enormous and will revolutionize the way people do banking.”
“The Reserve Bank has encouraged banks to explore the possibility of establishing new alliances with FinTech firms as it could be pivotal in accelerating the agenda of financial inclusion through innovation. It is essential that flow of investments to this sector is unimpeded to realise its full potential. It is imperative to create an ecosystem which promotes collaboration while carefully paying attention to the implications that it has for the macroeconomy.” - Shaktikanta Das, Governor, Reserve Bank of India
Bank of England (BoE)
The UK central bank is of the view that new technologies such as AI can uplift the resilience of the financial system. The bank says that it has a keen interest in exploring how fintech innovation might support its mission to “promote the good of the people of the UK by maintaining monetary and financial stability”. It started its proofs-of-concept programme in 2016 under its Fintech Accelerator project with a view to experimenting with new technology and set a new Fintech Hub that will sit at the heart of the Bank in 2018. During a speech at the Innovate Finance Global Summit in London, BoE governor Mark Carney said the banking sector is expected to invest a USD 10 billion on AI systems by 2020, saying that “new economy requires new finance”.
"AI-enabled solutions are increasingly important in fraud detection as well as automated threat intelligence and prevention. As some in the audience are exploring, there is also significant potential in credit assessments, wholesale loan underwriting and trading," - Mark Carney, BoE Governor
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