Banks Advised to Prepare for Risks Associated with AI and Machine Learning Utilization

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The remarks by Bank of Spain Governor Pablo Hernandez de Cos underscore the growing recognition among global banking regulators of the importance of addressing the risks associated with the use of artificial intelligence (AI) and machine learning (ML) in banking operations. De Cos emphasized the need for banks to integrate risk management and governance frameworks that account for the unique challenges posed by AI and ML technologies.

De Cos highlighted several key points:

1. Prudential and Financial Stability Challenges: There are significant uncertainties regarding whether the adoption of AI and ML in banking contributes positively or negatively to global financial stability. De Cos cautioned that if not properly managed, these technologies could potentially exacerbate future banking crises.
2. Collaboration and Regulatory Baseline: Given the increasingly interconnected nature of the financial industry due to digital innovation, de Cos stressed the importance of collaboration among central banks and regulators. Establishing an appropriate regulatory framework for overseeing the use of AI and ML in banking requires coordinated efforts to ensure effective oversight and risk mitigation.
3. Micro and Macro Risk Management: Banks must proactively identify and address risks associated with AI and ML technologies at both the micro (individual bank) and macro (system-wide) levels. This entails incorporating AI/ML-related risks into banks’ day-to-day risk management and governance practices.
4. Upcoming Basel Committee Report: The Basel Committee on Banking Supervision is preparing to release a comprehensive report on the digitalization of finance and its regulatory implications. This report is expected to provide further guidance and insights into addressing the challenges posed by AI and ML in banking operations.

Overall, de Cos’s remarks underscore the need for banks to approach the adoption of AI and ML technologies with caution and foresight, integrating robust risk management practices to mitigate potential adverse impacts on financial stability. Collaboration among regulators and industry stakeholders will be essential in developing a coherent regulatory framework that balances innovation with risk mitigation in the banking sector.