Compliance and innovation are interconnected, Acting
Comptroller of the Currency Michael Hsu told attendees at the Consumer Bankers
Association’s (CBA) 2024 conference in Washington, D.C. He believes artificial
intelligence and machine learning (AI/ML) can each be a source of strength for
compliance risk management systems moving forward.
To add emphasis to his point, Hsu drew comparisons to remarks
shared by two former regulators. First, he referenced former Comptroller Thomas
Curry, who described an explicit link between safety and soundness, fairness
and compliance. Next, he paraphrased points from a speech given by former
Federal Reserve Gov. Daniel Tarullo titled, “Good Compliance, Not Mere
Compliance,” which echoed many of the same sentiments.
“I am reiterating and building off these points because of
their growing salience today,” Hsu said. “Changes in product offerings and the
competitive environment are occurring at an increasingly rapid pace. This
presents an evolving range of potential benefits and risks to consumers — and a
challenging landscape for compliance risk managers.”
Equally essential to compliance are the elements of fairness
and trust, he said, adding that he believes trust can be achieved through
collaboration and a holistic approach that addresses credit access and
inclusivity.
“In short, successfully balancing innovation and growth with
safety, soundness, and fairness is getting harder,” Hsu said. “Consumer banking
and compliance are more inextricably linked now than ever. This presents a
challenge — and an opportunity — for banks and how they approach compliance
risk management.”
With respect to AI in banking, he stressed the necessity of ensuring
fairness and taking a collaborative approach to address the inherent complexities
and associated risks.
“The traditional zero-sum game approach is to trade off
compliance with innovation and growth, meaning more of one means less of the
other and vice versa,” Hsu said. “This is short-sighted. Strong and effective
compliance risk management should lead to greater freedom and more certainty to
innovate and grow. A well-developed sense of fairness can help ensure that
compliance risk management practices are effective, especially in areas that
are evolving.”
One of the most commonly cited risks presented by AI in the
banking system is the potential for bias and unintended discrimination, he
said, particularly when it is used to make credit decisions.
“[S]pecial attention needs to be paid to biases in training
data and in supervised and reinforcement learning, especially in the consumer
lending context,” Hsu said. “Even if an AI or ML system could achieve complete
colorblindness in decision-making at the individual level, it would still yield
unfair outcomes at the group level if baselines across groups differ. The AI
community has been grappling with this ‘impossibility theorem’ for some time in
the criminal justice context. Banks and regulators need to consider this and
should prepare for similar discussions with regards to consumer banking.”
In addition to technology, Hsu touched on the evolution of
overdraft fees in banking. When banks began using overdrafts in the 1990s, they
did not expect them to be used frequently. However, by 2015, consumers were
paying more than $11.2 billion in overdraft-related fees, he said. Recognizing
this fact, and certain underlying implications, the Consumer Financial
Protection Bureau (CFPB) and the Office of the Comptroller of the Currency
(OCC) saw a need to take action.
“The slow and steady growth of overdrafts impacted customers
and masked concerning practices,” Hsu explained. “Beginning in late 2021, the
OCC, CFPB, and other agencies began advocating for reform, issuing risk
management guidance, taking enforcement actions, and initiating a rulemaking to
clarify the guardrails for overdrafts.”
Since these guardrails were installed, bank revenues from
consumer overdrafts have generally declined to $6 billion in 2023, he noted,
adding that overdraft programs have evolved to become “more pro-consumer.”
“More importantly, banks that had adopted or pivoted early
to a fairness approach to overdrafts — i.e., limiting fees and empowering
consumers — have been able to go on offense and strengthen their retail deposit
franchises,” he added.