The application of artificial intelligence (AI) tools in banking industry could bring benefits and challenges to consumers, bankers and regulators, US Federal Reserve (Fed) Governor Lael Brainard said on Tuesday.
Speaking at a public event in the state of Pennsylvania, Brainard noted that AI could bring a more inclusive way in credit-scoring, which may result in lower prices and faster process for the consumers.
"Banks and other financial service providers are using AI to develop credit-scoring models that take into account factors beyond the usual metrics," said Brainard.
"There is substantial interest in the potential for those new models to allow more consumers on the margins of the current credit system to improve their credit standing, at potentially lower cost," he said.
"AI also has the potential to synchronise creditors to a more accurate model and price risk, and to bring greater speed to decisions," said Brainard.
However, Brainard warned that AI approaches are not free of bias for consumers because the algorithms and models reflect the goals and perspectives of the developers.
"As a result, AI tools can reflect or 'learn' the biases of the society in which they were created," Brainard said.
For banking firms that employ AI as their new tools, Lael expected that their back-office operations, such as advanced models for capital optimisation, model risk management, stress testing, and market impact analysis would benefit from the adaption.
AI approaches could also be applied to trading and investment strategies. Moreover, AI advancements could also take off some risks for the banks and financial service providers.
He also highlighted some challenges over AI use in the fraud prevention and cyber security, especially when the AI is used for wrongful means.
"The wide availability of AI's building blocks means that phishers and fraudsters have access to best-in-class technologies to build AI tools that are powerful and adaptable."
While most phishing attacks against consumers lacked personalisation likely due to the high cost, Brainard warned that AI tools could be used to make internet fraud and phishing highly personalised at a lower cost in the future.
Facing such new challenges, supervised institutions will also need tools that are just as powerful and adaptable as the threats that they are designed to face.
"It may be that AI is the best tool to fight AI," said Brainard.
Brainard also noted that many AI tools and models may deliver analysis, conclusions, or decisions that are hard to explain.
"Depending on what algorithms are used, it is possible that no one, including the algorithm's creators, can easily explain why the model generated the results that it did."
Speaking of Fed's regulatory view on the AI approaches, Brainard said that AI presents regulators with a responsibility to act with thoughtfulness and perspective in carrying out their mandates, according to Xinhua.
"The AI tool should be subject to appropriate controls," said Brainard, "including how the AI tool is used in practice and not just how it is built."