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Towards Self-Regulating AI: Challenges and Opportunities of AI Model Governance in Financial Services

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  • Eren Kurshan
  • Hongda Shen
  • Jiahao Chen

Abstract

AI systems have found a wide range of application areas in financial services. Their involvement in broader and increasingly critical decisions has escalated the need for compliance and effective model governance. Current governance practices have evolved from more traditional financial applications and modeling frameworks. They often struggle with the fundamental differences in AI characteristics such as uncertainty in the assumptions, and the lack of explicit programming. AI model governance frequently involves complex review flows and relies heavily on manual steps. As a result, it faces serious challenges in effectiveness, cost, complexity, and speed. Furthermore, the unprecedented rate of growth in the AI model complexity raises questions on the sustainability of the current practices. This paper focuses on the challenges of AI model governance in the financial services industry. As a part of the outlook, we present a system-level framework towards increased self-regulation for robustness and compliance. This approach aims to enable potential solution opportunities through increased automation and the integration of monitoring, management, and mitigation capabilities. The proposed framework also provides model governance and risk management improved capabilities to manage model risk during deployment.

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  • Eren Kurshan & Hongda Shen & Jiahao Chen, 2020. "Towards Self-Regulating AI: Challenges and Opportunities of AI Model Governance in Financial Services," Papers 2010.04827, arXiv.org.
    • Handle: RePEc:arx:papers:2010.04827
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    References listed on IDEAS

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    1. Armour, John & Mayer, Colin & Polo, Andrea, 2017. "Regulatory Sanctions and Reputational Damage in Financial Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(4), pages 1429-1448, August.
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