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AI: Banks should “Take it steady” advises OCC

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Banks should innovate with AI with caution, and should involve risk professionals in their innovation planning, said the head of the Office of the Comptroller of the Currency (OCC) at a recent risk and compliance conference in Seattle, hosted by the American Bankers Association.

Acting comptroller of the currency Michael J. Hsu [pictured] began by identifying AI and tokenization as: “Two innovations that are evolving quickly and have the potential to be highly impactful on banking”, before going on to highlight risks involved. Aligning AI systems with their design goals is a core challenge, he said.

 “AI systems, which are generally based on neural networks, are not programmed explicitly like most software. They require training, and their outputs are not predictable. While this is part of their magic, it also creates a fundamental problem: since AI systems are built to ‘learn’, they may or may not do what we want or behave consistent with our values. This alignment problem is inherent to all AI systems and is the focus of intense research.”

Hsu went on to outline key regulatory principles for regulating AI innovation:

Innovate in stages: “Innovating in stages requires discipline. The concept is simple: start with what can be controlled, expand only when ready, monitor carefully, adjust, and repeat.”

Build the brakes while building the engine: “Risk and compliance professionals need to be at the innovation table and have their voices heard. In the technology space, speed to market is an important factor in innovation. Slowing things down is seen as anti-innovative. Structurally and culturally, this casts the risk and compliance functions as barriers to innovation.”

Engage regulators early and often. Hsu said this can be achieved by: “Giving risk and compliance professionals a seat at the innovation table from the get-go and heeding their input. Empowering them to identify risks and risk mitigants will help ensure that the products and services that result will be safe, sound, fair, and trusted”. 

In conclusion, Hsu referenced the OCC’s new Office of Financial Technology. “Regulators, of course, must be responsive, knowledgeable, and agile. This is why we recently expanded and upgraded our Office of Innovation to the Office of Financial Technology and hired a Chief Financial Technology Officer. Building a bigger and stronger team fluent in both financial technology and bank supervision will allow us to keep up with developments more easily, to engage banks and fintechs more actively, to educate examiners and policy staff more effectively, and to collaborate with peer agencies more regularly.”

[Image Source: Office of the Comptroller of the Currency]