Treasury Seeks Public Input on AI Use in Financial Services

The U.S. Treasury Department has initiated a comprehensive effort to gather public comments on the integration of artificial intelligence (AI) in the financial services sector. This move underscores the department’s commitment to understanding and managing both the opportunities and risks associated with AI. Treasury Secretary Janet Yellen highlighted these efforts during the Financial Stability Oversight Council (FSOC) Conference on Artificial Intelligence and Financial Stability, emphasizing the need for a balanced approach to AI adoption in finance.

AI presents significant opportunities for the financial sector, enhancing forecasting, portfolio management, fraud detection, and customer service. Advanced AI technologies such as natural language processing, image recognition, and generative AI have the potential to make financial services more accessible and cost-effective. However, these benefits come with substantial risks. The FSOC’s 2023 annual report identified the broader adoption of AI as a new vulnerability, highlighting concerns about the complexity and opacity of AI models, inadequate risk management frameworks, and potential systemic risks from the concentration of AI service providers.

Secretary Yellen emphasized the potential dangers, including the possibility of AI models perpetuating or introducing biases due to insufficient or faulty data. The centralization of AI models and data could also create single points of failure, exacerbating existing risks within the financial system. The rapid evolution of AI technologies necessitates robust frameworks to manage these risks effectively.

The Biden Administration has prioritized harnessing AI’s potential while mitigating associated risks. The Treasury Department is leveraging existing frameworks such as model risk management guidance and third-party risk management to address AI-related risks. Additionally, the department is engaged in extensive research to understand AI’s financial and economic impacts better.

In March, under President Biden’s Executive Order on AI, the Treasury released a detailed report outlining current AI use cases and best practices for cybersecurity and fraud prevention in the financial sector. This report also proposed key steps to address immediate operational risks, cybersecurity threats, and fraud challenges associated with AI.

The Treasury is also collaborating with federal financial regulators to align efforts on AI-related issues. One of the priorities in Treasury’s 2024 National Illicit Finance Strategy is utilizing AI to mitigate risks related to money laundering, terrorist financing, and sanctions evasion. The Internal Revenue Service (IRS) has already implemented AI for enhanced fraud detection, demonstrating the practical applications of AI within the Treasury’s operations.

The Treasury’s request for information (RFI) seeks input from a broad range of stakeholders, including financial institutions, consumers, advocates, academics, and industry experts. The RFI aims to gather insights on existing AI tools, emerging technologies, and the benefits and challenges of AI in various aspects of financial services, including risk management, capital markets, internal operations, customer service, and regulatory compliance.

Key areas of interest include the use of AI by financial institutions, barriers faced by smaller banks in AI deployment, the impact of AI on low-to-moderate-income consumers and underserved communities, and the development and application of AI models. The Treasury is also interested in understanding how industry stakeholders apply risk management frameworks to AI use.

Secretary Yellen announced the launch of a formal public request for information to gather comments from financial institutions, consumers, and other stakeholders. This initiative is part of Treasury’s broader efforts to enhance understanding and management of AI in the financial sector. Additionally, the Treasury’s Federal Insurance Office will convene a roundtable discussion on AI and insurance to explore the benefits and challenges of AI use by insurers, best practices, and potential consumer protections.

The public is encouraged to submit their comments within 60 days, contributing to a collective understanding of how AI can be harnessed to promote inclusive and equitable access to financial services while mitigating associated risks. The insights gathered from this initiative will inform the Treasury’s strategies and policies, ensuring that the financial sector can leverage AI’s potential responsibly and effectively.