The Overlooked Risk in Bank AI Adoption: Regulatory Inaction

Washington. D.C. - The banking system and its customers would benefit from a regulatory approach that actively encourages artificial intelligence adoption, BPI said in a letter filed yesterday in response to the White House Office of Science and Technology Policy's Request for Information on Regulatory Reform on Artificial Intelligence. A more proactive regulatory approach to AI would enable banks to protect against fraud and hacks, root out financial crime and serve customers more efficiently. This proactive approach, which aligns with the administration's call for supporting technological innovation, would require the modernization of legacy model risk frameworks, harmonization of federal regulations and standards on banks' use of AI and comparative parity for banks and nonbank innovators.

Background. The OSTP sought comment from the public on potential federal regulatory reforms and other government actions that can promote U.S. AI innovation and adoption, in line with the White House's AI Action Plan recommendations released in July 2025.

"Artificial intelligence is causing a seismic shift in society, and it requires an equally fundamental shift in bank oversight: one that acknowledges the risk to the banking system from inaction. Bank supervision in recent decades has taken a gradual approach to technology, but the rapid, large-scale adoption of AI leaves no time to hesitate. Banking agency principals and the White House have wisely chosen to break barriers to technological innovation in the banking sector, and reform of supervisory requirements that impede bank AI adoption would represent a sensible next step in these efforts." - Heather Hogsett, Executive Vice President and Head of BITS

Inertia. The current approach is slow and overly cautious, requiring banks to engage in months-long model risk reviews and compliance processes before deploying any new AI tools, even for potentially low-risk use cases. Fear of enforcement actions and adverse supervisory outcomes can significantly delay AI adoption, including in cases where it would help banks confront the most urgent threats to their security.

• Adversaries Aren't Slowing Down. AI adoption is flourishing among criminals, from money laundering to fraud, and regulators should encourage, not discourage, defensive AI deployment among banks to combat these threats.
• More Urgent than Ever, But Not New. Banks have long used AI to detect and prevent fraud, and the technology also has compelling uses in illicit finance detection and cybersecurity.

Recommendations. Policymakers should keep the following principles in mind as they consider changes to regulations affecting banks' AI practices.

• Banking regulators should actively encourage the use of AI by banking organizations and consider the risks of not innovating.
• Regulators should immediately narrow the scope of Model Risk Management Guidance to exclude AI technologies unless they are used for regulatory capital and liquidity calculations. This regulatory guidance, often used by examiners as a set of check-the-box instructions on how banks should validate and document the models they use across their operations, is among the most constraining supervisory policies on banks' adoption of technology.

• The federal banking regulators should set and implement a coordinated, consistent regulatory framework to support continued AI adoption.
• Regulators should also tailor regulations and policies with an eye to achieving parity between banks and third parties, including vendors and nonbank competitors.

Bottom Line. BPI's recommended approach requires a fundamental shift that accounts for the risk of inaction when overseeing AI adoption, recognizing that failure to update banks' toolkits in fraud detection, illicit finance prevention and cybersecurity can pose equal or greater risk to banks and the financial system compared to the risks of adopting new technologies. This fundamental shift aligns with the administration's pursuit of innovation in banking and reversals of supervisory hurdles to banks' technological exploration.

Learn More:

• The Most Damaging Guidance in Banking
• BPI Proposes 4 Key Considerations to Advance AI in Banking
• BPI Response to White House Office of Science and Technology Policy's Artificial Intelligence Action Plan
• BPI Comments on the Uses, Opportunities and Risks of AI in Financial Services

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About Bank Policy Institute.

The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.

Media Contacts

• Tara Payne, Bank Policy Institute, [email protected]