Risk & Compliance Hot Topics: AI Bias, Crypto and the Banking Crisis, AML Regulation

  • May 5, 2023
  • Quantivate

This month’s roundup of recent news and developments in the world of governance, risk, and compliance (GRC) for financial services includes:

Let’s dive in:

CFPB, FTC, other federal agencies issue joint statement on AI-based discrimination

On April 25, four federal agencies issued a joint statement pledging their commitment to ensuring that automated systems—including those marketed as artificial intelligence, or AI—don’t violate consumer rights.

The statement warns that AI-based discrimination can occur when institutions use software and algorithms to make decisions that impact fair and equal access to jobs, housing, credit opportunities, and other goods and services.

Unchecked AI poses threats to us and our civil rights in ways that are already being felt,” said CFPB Director Rohit Chopra. “Technology companies and financial institutions are amassing massive amounts of data and using it to make more and more decisions about our lives, including whether we get a loan or what advertisements we see.”

While emerging technologies can automate tasks and increase efficiency, the statement warns that they may also “perpetuate unlawful bias, automate unlawful discrimination, and produce other harmful outcomes” through problems like unrepresentative or imbalanced datasets or a lack of transparency about the system’s design or operating model.

“The CFPB is thinking about the future of banking,” Chopra added. “We’re doing some work right now on how [generative AI] might undermine or create risks in customized customer care, to the extent that biases are introduced, or frankly, even the wrong information.”

Regulators debate crypto’s influence on banking crisis

Did having depositors in the cryptocurrency industry contribute to recent bank failures? Regulators from the Securities and Exchange Commission (SEC) and New York State Department of Financial Services (NYDFS) are debating the issue, Banking Dive reports.

Within the span of a week in late April, SEC Chair Gary Gensler told the House Financial Services Committee that the failures of Silicon Valley Bank, Signature Bank, and Silvergate Bank were directly linked to exposure to cryptocurrency, while NYDFS Superintendent Adrienne Harris called his conclusion a “misnomer” during a separate hearing.

Regulatory agencies release postmortems on SVB and Signature Bank failures

In related news, the Federal Reserve Board and FDIC released their reviews of the failures of Silicon Valley Bank (SVB) and Signature Bank, respectively, on April 28.

The Federal Reserve report called SVB’s circumstances a “textbook case of mismanagement,” highlighting that the bank’s management team and board of directors failed to manage risks, particularly in the areas of interest rate risk and liquidity risk.

Related Reading | Silicon Valley Bank: Risk Management Missteps Explained

Likewise, the FDIC analysis called out poor management as the root cause of Signature Bank’s failure, including a lack of good governance practices and inadequate liquidity risk management.

“SBNY’s board of directors and management pursued rapid, unrestrained growth without developing and maintaining adequate risk management practices and controls appropriate for the size, complexity and risk profile of the institution.”

This comes as the banking crisis continues with a third major shutdown (the second-largest in U.S. banking history), California-based First Republic Bank, which was seized by regulators on May 1.

Treasury Department recommends new AML/CFT requirements for financial institutions

In a report released on April 25, the Treasury Department raised the possibility of regulation that would require financial institutions “to have reasonably designed and risk-based AML/CFT [anti-money laundering/countering the financing of terrorism] programs supervised on a risk basis, possibly taking into consideration the effects of financial inclusion.”

The report also recommends clarifying and revising or updating AML/CFT regulations and guidance under the Bank Secrecy Act. The recommendations are aimed at discouraging de-risking, or “the practice of financial institutions terminating or restricting business relationships indiscriminately with broad categories of clients rather than analyzing and managing the risk of clients in a targeted manner,” and promoting financial inclusion.

Regional banks consider risk technology upgrades

This year’s banking crisis has many institutions taking a hard look at their risk management capabilities. Analysts predict that “banks will increase their annual spends on risk technology by 8% to 12% in the next 12 months,” American Banker reports.

“As banks seek to manage end-to-end risk, including in the areas of liquidity, operations and cybersecurity, they’ll allocate more money to vendors and solutions for data analytics, financial crime surveillance, regulatory compliance, and audit.”

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