What the Bank for International Settlements (BIS) Says About Governing AI in the Financial Sector

From Efficiency to Accountability: The BIS on AI's Impact in the Financial Sector

The Bank for International Settlements (BIS) has released its latest findings on the growing use of artificial intelligence (AI) in the financial sector. With its focus on operational efficiency, risk management, and customer experience, the report delves into how AI is reshaping the banking and insurance markets.

However, it doesn’t shy away from addressing the associated risks and regulatory challenges, signalling areas where oversight needs to catch up with innovation.

AI's Role in Boosting Efficiency and Customer Experience

AI technologies are proving invaluable in improving operational efficiency across financial institutions. From automated loan approvals to personalised insurance policies, these tools are speeding up processes that once took weeks. Chatbots and virtual assistants are already becoming household names, helping customers with everything from account inquiries to claims processing in real-time.

The potential for tailored services is a standout. Banks are using AI to analyse customer data and predict needs, offering customised products before clients even realise they need them.

Similarly, insurers are harnessing AI to assess risks more accurately, enabling fairer pricing and faster payouts. Yet, with these innovations come significant challenges, particularly in ensuring that AI-driven decisions are transparent and fair.

The Risks Behind the Benefits

While the advantages of AI are undeniable, the BIS report highlights several risks that demand attention. Chief among these is model risk management—ensuring AI models are reliable, robust, and not prone to biases. If unchecked, flawed models could lead to discriminatory outcomes, financial losses, or reputational damage.

Another key concern is the reliance on third-party AI service providers. Many financial institutions outsource AI capabilities to specialised companies, creating dependency on external expertise. This raises questions about accountability and oversight. Who is responsible if an AI tool fails or breaches regulations—the financial institution or the third-party provider?

The report also touches on the risks posed by non-traditional players—tech firms and startups entering the financial market. These companies often operate outside traditional regulatory frameworks, creating challenges for regulators trying to maintain a level playing field while encouraging innovation.

Governance and Expertise: The Need for Stronger Foundations

Governance and expertise within financial institutions are recurring themes in the BIS investigation. Proper oversight of AI systems requires decision-makers who understand the technology’s complexities and limitations. Many firms lack the necessary in-house expertise to evaluate AI’s risks effectively, leading to gaps in governance.

The report emphasises the importance of data governance as well. Financial institutions handle sensitive customer data, and AI systems rely heavily on this information to function. Ensuring data is accurate, secure, and ethically managed is a critical priority. Poor data governance not only undermines AI's effectiveness but also exposes firms to legal and reputational risks.

Emerging Business Models: Regulation Playing Catch-Up

AI is also giving rise to entirely new business models in banking and insurance. From pay-per-use insurance policies to AI-driven investment platforms, traditional boundaries are being redefined. While these innovations promise to make financial services more accessible and efficient, they also raise fresh regulatory questions.

For instance, how should regulators approach platforms that combine banking and non-financial services, such as lifestyle apps that offer loans or insurance? What happens when AI systems cross international borders, operating under multiple legal frameworks? These are just some of the questions regulators need to address as AI continues to blur industry lines.

The Regulatory Imperative

The BIS report states the need for an AI-specific regulatory review across several key areas. Regulators must establish clear guidelines for how AI should be governed, ensuring accountability at all levels.

This includes setting standards for expertise and skills within firms, defining roles and responsibilities for third-party providers, and adapting existing frameworks to accommodate new players and business models.

Ultimately, the BIS investigation serves as a wake-up call for the financial sector. While AI offers tremendous opportunities, its risks cannot be ignored. Strong governance, clear regulations, and an ongoing dialogue between industry and regulators are essential to harness AI's potential responsibly.