Federal Reserve Governor Michelle W. Bowman recently delivered insightful remarks at the 27th Annual Symposium on Building the Financial System of the 21st Century, emphasizing the transformative potential of artificial intelligence (AI) in the financial services industry. Her comments underscored the dual imperatives of innovation and responsible regulation, offering a roadmap for institutions seeking to harness AI's benefits while navigating an evolving compliance landscape.
AI's Promise in Financial Services
AI continues to revolutionize financial services, with applications spanning fraud prevention, credit underwriting and operational efficiency. Bowman highlighted how AI-driven tools have enabled institutions to analyze vast volumes of unstructured data, enhancing decision-making processes. For instance, financial institutions have increasingly relied on AI to detect and prevent fraud, including high-profile schemes targeting checks and U.S. Treasury instruments. Notably, the “U.S. Treasury Department recently announced that fraud detection tools, including machine learning AI, had resulted in fraud prevention and recovery totaling over $4 billion in fiscal year 2024, including $1 billion in recovery related to identification of Treasury check fraud.”
In addition to improving internal operations, AI has played a critical role in expanding credit access. By integrating alternative data sources, such as payment histories and other non-traditional metrics, AI has allowed financial institutions to extend credit to underserved populations, addressing long-standing inequities in financial access.
However, Bowman cautioned that the rapid adoption of AI also introduces risks, including potential disparities in outcomes and vulnerabilities related to data privacy, intellectual property and cybersecurity.
Navigating the Regulatory Landscape
Bowman articulated a vision for a regulatory framework that is neither overly prescriptive nor excessively permissive. The challenge, she noted, lies in crafting rules that support innovation while safeguarding against systemic risks. A central question regulators face is how to define AI. A broad definition might offer flexibility to encompass future developments but could inadvertently sweep in benign or unrelated technologies, leading to unnecessary compliance burdens. On the other hand, a narrow definition risks obsolescence as AI evolves.
Importantly, Bowman stressed that financial institutions are not operating in a legal vacuum. Existing regulations governing fair lending, cybersecurity, third-party risk management, copyright and privacy already apply to many AI use cases. She called for institutions to consider these frameworks when deploying AI, noting that overregulation could drive activity into less-regulated or unregulated corners of the financial system, potentially increasing systemic risks.
Practical Implications for In-House Counsel
For in-house counsel, Bowman’s remarks highlight the importance of embedding AI oversight within broader compliance and governance frameworks. Institutions should develop a deep understanding of how AI technologies are being deployed across business lines and consider the specific legal and ethical implications of each application.
AI’s use in fraud detection, for example, requires rigorous validation to ensure models function effectively and equitably. Similarly, the use of alternative data in credit underwriting necessitates compliance with anti-discrimination laws, such as the Equal Credit Opportunity Act, to prevent disparate impacts on protected groups. Many AI regulations being considered or passed on the state level relate to bias avoidance.
Moreover, in-house counsel should prepare for heightened regulatory scrutiny by strengthening internal expertise on AI-related risks. This includes fostering collaboration across departments —legal, compliance, IT, and operations — to address AI’s implications holistically. Open and transparent communication with regulators will also be crucial, as agencies refine their approaches to overseeing AI.
The Future of AI Regulation in the Financial System
Bowman’s address reflects a recognition that AI is not merely a technological tool, but a transformative force requiring careful stewardship. She urged financial institutions to engage proactively with regulators, contribute to the policy dialogue and prioritize responsible innovation. For in-house counsel, this means not only ensuring compliance with current laws, but also positioning their organizations to adapt to an unpredictable regulatory future.
