OCC’s Michael Hsu encourages banks to apply guardrails to AI use

Warning of an “eventual reckoning” on artificial intelligence (AI) use by financial institutions, the acting head of the Office of the Comptroller of the Currency (OCC) said the industry should learn lessons on how similar disruptive technologies like derivatives and cryptocurrency evolved from being helpful to dangerous.

In a speech delivered Thursday at a Financial Stability Oversight Council (FSOC) conference, Michael Hsu said the risks posed by AI use by financial institutions might lead to bad outcomes, similar to when derivatives and financial engineering contributed to the 2008 financial crisis or cryptocurrencies’ crashing values during the “crypto winter” of 2022.

“If the past is any guide, the micro- and macro-prudential risks from such uses will emanate from overly rapid adoption with insufficiently developed controls,” he said. “What starts off as responsible innovation can quickly snowball into a hypercompetitive race to grow revenues and market share, with a ‘we’ll deal with it later’ attitude toward risk management and controls.”