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Artificial Intelligence in Banking Supervision: Balancing Automation with Human Interaction

In recent times, the integration of Artificial Intelligence (AI) in the banking sector has gained significant momentum. AI-powered systems are being used to perform various functions, including customer service, fraud detection, and risk management. However, as banks continue to rely more on AI-powered systems, it's essential to ensure that the human touch in banking supervision is not lost.

Artificial Intelligence in Banking Supervision: Balancing Automation with Human Interaction

The banking industry is highly regulated, and ensuring compliance with regulatory requirements is critical. Human supervisors have traditionally been responsible for monitoring and enforcing these regulations. However, with the increasing use of AI-powered systems, there's a risk that the human touch may be lost. Therefore, it's essential to ensure that AI-powered systems are designed to complement human supervisors rather than replace them.


One way to achieve this is by implementing AI-powered systems that are transparent and explainable. This means that the decision-making process of the AI system is clear, and the reasons for the decisions made are easily understandable by human supervisors. This approach would enable human supervisors to make informed decisions and take appropriate actions when necessary.


The integration of AI in the banking industry is inevitable, and it presents numerous benefits. However, it's essential to ensure that the human touch is not lost in the process. Implementing transparent and explainable AI systems is crucial to achieving this goal.


Artificial Intelligence and Banking Supervision


Artificial Intelligence (AI) has become an integral part of banking supervision. While AI has the potential to automate data-intensive activities and enhance banking supervision capabilities, supervisors are emphasizing the importance of human expertise in managing the associated risks. Banks are increasingly using AI as a tool, and supervisors are keen on understanding how banks are managing the risks that come with it. Furthermore, supervisors are focused on establishing human teams with the necessary skills to mitigate these risks.


With the rapid pace of digitalization and the increasing use of technology in our daily lives, individuals and institutions are becoming increasingly susceptible to cybercrime. It's not uncommon to hear news of a major cyberattack or troubling experiences affecting colleagues, friends, or family members on a daily basis.


Banks are highly sensitive to threats related to IT and cyber risks. Consequently, the European Central Bank has identified IT and cyber risk as one of its key supervisory priorities. The ECB will address this topic by conducting IT on-site inspections and requiring significant banks to report significant cyber incidents through the SSM cyber incident reporting process. The supervision of IT risks is not limited to banks alone; it includes payment systems and market infrastructures.


Banks are encouraged to cooperate with a wide range of stakeholders, both internally and externally, through frameworks such as TIBER-EU, market-wide crisis communication exercises like UNITAS, and the publication of the final version of the Cyber Resilience Oversight Expectations. These expectations include best practices for developing cyber resilience in the financial sector.


AI Capabilities to Fight Against Cybercrime


The threat of cybercrime is increasing day by day. But, fortunately, the range of cybersecurity tools is also expanding. One of the most promising tools is artificial intelligence (AI). AI has the potential to fight against various crimes, including cybercrime, money laundering, terrorist financing, mis-selling, and fraud. AI can quickly identify patterns in large and unstructured datasets, which can enhance the speed and accuracy of crime detection. Additionally, it can automate and enhance data-intensive activities such as regulatory reporting, which can reduce risks and lower costs.


The European Central Bank is highly interested in understanding how banks are utilizing AI, as every new technology brings potential challenges. Currently, AI is mainly being used by banks to automate repetitive tasks like data reconciliations. The use of deep learning, which enables algorithms to alter the way banks function with minimal human intervention, is relatively new. However, there are potential risks associated with the use of AI, regardless of the purpose it serves.


There are potential risks associated with AI, regardless of the purpose it is used for – include: 


  • Data bias refers to the risk of statistical errors or interference arising from the inherent features of datasets. It is important to be cautious of this risk while analyzing data.

  • Privacy breaches should be avoided at all costs, even if it means compromising the efficiency of data analysis. Protecting sensitive personal and commercial data is of utmost importance.

  • To ensure that big data remains accessible, a shared set of criteria for data preservation will be vital.

  • The General Data Protection Regulation (GDPR) outlines limitations on automated decision-making which can reduce the efficiency and efficacy of AI. It is important to keep these regulations in mind while developing AI systems.

  • As AI technology continues to advance, the potential for malicious manipulation of big datasets also increases. It is important to be vigilant in detecting and preventing such incidents.

  • The more advanced AI algorithms become, the harder it can be to understand and monitor the conclusions that they draw. This opacity can pose challenges for assessing the accuracy and fairness of AI-generated outputs.


To effectively manage risks, it is important for banks to have a robust governance framework. It is also essential for banks to form teams comprising of individuals with diverse skill sets such as scientific, engineering, statistical, and economic skills.


This is important because AI programs are only as good as their underlying data and human interpretation. Although AI is still in its early stages, it is becoming increasingly important for banks and supervisors to use and manage it effectively in the coming decade.


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