AI model risk: What the current model risk management framework can teach us about managing the risks of AI models

Catarina Souza
Additional contact information
Catarina Souza: Head of Model Development and Review Division, Bank of England, UK

Journal of Financial Compliance, 2023, vol. 6, issue 2, 103-112

Abstract: The rapid adoption of Artificial Intelligence (AI) among financial institutions in recent years creates several opportunities, but also presents significant risks that require adequate risk management. Despite advances in recent years, AI regulation remains fragmented. This creates a challenge for financial institutions when looking for guidance on how to address the emerging risks presented by the use of AI. Given the complexity and speed of revision, AI models tend to propagate and amplify existing model risk. This grants them the potential to be more harmful, and raises important model ethics concerns. This paper discusses how the existing model risk management framework can offer important lessons for financial institutions on how to tackle these emerging risks. Additionally, the paper explores possible enhancements to the model risk management framework in order to address the unique challenges posed by AI models. These include adapting governance and policies, including model ethics considerations; enhancing model risk identification and classification; and updating model life cycles, with an emphasis on data management, model development, validation and monitoring. While the author agrees that AI risks are diverse in nature, the focus of the paper is on the risks derived from the use and development of AI models.

Keywords: model risk; SR 11-7; artificial intelligence (AI); machine learning (ML); model risk management; model life cycle; model ethics (search for similar items in EconPapers)
JEL-codes: E5 G2 K2 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hstalks.com/article/7477/download/ (application/pdf)
https://hstalks.com/article/7477/ (text/html)
Requires a paid subscription for full access.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aza:jfc000:y:2023:v:6:i:2:p:103-112

Access Statistics for this article

More articles in Journal of Financial Compliance from Henry Stewart Publications
Bibliographic data for series maintained by Henry Stewart Talks ().