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U.S. agencies address AI risks in finance

U.S. agencies address AI risks in finance

AI Finance Risks

The U.S. financial regulatory agencies are preparing to address the risks of artificial intelligence (AI) in the financial services sector. These agencies can use their existing legal powers to reduce AI’s economic impacts, which include consumer fraud, algorithmic discrimination, and cybersecurity threats.

In March 2024, the U.S. Treasury Department released a report that highlighted AI-specific cybersecurity risks and emphasized the importance of effective risk management, governance, and controls in using AI technologies.

Financial institutions should manage AI technologies safely, soundly, and fair way. They should follow applicable laws and regulations related to consumer and investor protection. Janet Yellen is the U.S. Secretary of the Treasury.

Earlier this year, she stressed the importance of addressing AI risks during a tour of the Financial Crimes Enforcement Network (FinCEN) in Vienna, Virginia. The Treasury Department’s report and recent executive orders have led to a closer look at how AI is integrated into financial systems and prompted an examination of AI’s impact on consumers and institutions.

Existing laws and regulations may not explicitly mention AI. However, they provide a framework that can promote the safe and fair implementation of AI in financial services. Agencies should conduct thorough due diligence and continuously monitor AI services.

They should ensure these services align with regulatory expectations and protect consumer interests. The impacts of AI on consumers, banks, nonbank financial institutions, and the financial system’s stability are significant concerns.

Addressing AI risks in finance

Regulators should use their current authorities to address these risks. Further legislation may be necessary to manage AI’s integration into the financial sector fully. A key focus of regulatory efforts is encouraging financial institutions to identify, measure, monitor, and manage risks associated with AI.

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This includes reducing algorithmic discrimination, preventing fraud, and ensuring transparent and explainable AI models. The Treasury Department’s guidance calls for oversight that matches the risk levels associated with AI-supported business processes. In October 2023, the “Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence” assigned specific AI-related tasks to executive branch financial regulators.

Independent regulatory agencies are also encouraged to address AI risks proactively. They should protect American consumers from fraud, discrimination, and privacy threats. AI poses known and unknown risks to both financial services consumers and the banking sector, both domestically and internationally.

The recommendations provided aim to foster a discussion and vetting process of potential regulatory actions. They do not outline definitive steps. The goal is to effectively use existing authorities while exploring additional measures to manage AI’s challenges and leverage its opportunities in finance.

Various federal entities are actively involved in this regulatory landscape. These include the Treasury Department, Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, National Credit Union Administration, Securities and Exchange Commission (SEC), and Consumer Financial Protection Bureau, among others. Each has the potential to use its specific legal authorities to address and govern the integration of AI within the financial services sector.

Ultimately, the efforts of financial regulatory agencies aim to ensure that AI technologies are implemented in a way that is safe, equitable, and conducive to the stability of the financial system. They seek to safeguard the interests of consumers and the broader economy.

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