Introduction
AI in banking is moving from a pilot-phase innovation to a core regulatory concern. The Bank for International Settlements and European supervisors warn that AI systems that shape financial outcomes are now matters of prudential supervision with clear implications for stability and competition.
The Regulatory Shift: AI as “Material Models”
Supervisors are treating AI systems that materially affect decisions or operations as “material models” subject to model risk governance comparable to credit scoring engines or payments infrastructure. Expectations include documented governance frameworks, independent validation, continuous monitoring, and resilience testing. Targeted reviews will focus on high-impact use cases, including generative AI that influences customer interactions, decisioning or market behaviour. Firms are expected to demonstrate traceability, performance baselines, and escalation protocols when models deviate from norms.
Systemic Vulnerabilities and Strategic Imperatives
Regulators point to systemic channels: correlated outcomes across institutions using similar models, operational concentration on a few third-party providers, and synchronized behaviours that could amplify stress. Large incumbents’ AI investments may become a market baseline, pressuring smaller banks to either scale quickly or cede competitive ground.
Board-level questions should include:
- Which AI-driven decisions could produce correlated losses across the sector?
- How dependent are we on third-party models and cloud services, and what are the contingency plans?
- How do models behave under stress and when input distributions shift?
- Do validation processes cover explainability, bias testing, and adversarial resilience?
Operationally, firms must integrate AI validation into business continuity and vendor risk programs, and align capital and liquidity planning with model risk scenarios.
Conclusion
AI is now a test of financial-system stability and governance. Effective AI oversight is a baseline safety requirement and a strategic differentiator for institutions that can demonstrate resilient, well-governed deployments.
