How can GenAI help banks manage risk and compliance?

Artificial intelligence (GenAI) is poised to be the catalyst for the next wave of productivity growth across industries, including financial services in particular. From modeling analytics to automating manual tasks and aggregating unstructured content, GenAI is already changing the way banking functions work, including how financial institutions Risk management and regulatory compliance.

It is imperative that risk and compliance departments put safeguards around the use of GenAI in governance. However, the good side is that GenAI can also help improve and enhance the performance of these components themselves. In this article, we will discuss how banks can use GenAI in risk management and compliance.

Seize the potential of GenAI

Over the next 3 to 5 years, GenAI's potential is to innovate the way banks manage risk. It allows functional departments to move away from task-specific activities and instead shift to collaborating with business lines to prevent strategic risks, while taking control from the start. early in the new customer journey, often referred to as the Shift Left approach.

On the other hand, thanks to this proactive control, risk management experts can also advise businesses on strategic business decisions and new product development, exploring trends and risk scenarios. emerging risks, enhance resilience, and proactively improve risk and process control.

Emerging applications of GenAI in risk management

Among the many promising applications of GenAI for financial institutions, there are several candidates that banks are exploring for the first wave of adoption, which can be classified into 3 main categories based on prototype uses, including: virtual expert - users can ask questions and receive answers compiled based on documents; manual process automation tool (manual process automation) - Gen AI helps users perform tasks that require a lot of time to perform; and code acceleration tool (code acceleration) - GenAI helps users update or translate old code or write completely new code.

Each of these archetypes can have a key role in risk management and compliance:

Regulatory compliance.

Businesses are using GenAI as a virtual expert by training it to answer questions about business regulations, policies, and guidelines. GenAI can also compare policies, regulations and operating procedures. As a source code accelerator, it can check code for deviations and compliance gaps and provide warnings about potential violations.

Preventing Financial Crime

GenAI can generate suspicious activity reports based on customer and transaction information. It can also automate the creation and updating of customer risk ratings based on changes in your customer insight attributes. By creating and improving code to detect suspicious activity and analyze transactions, GenAI can improve banks' transaction monitoring.

Credit Risk Warning

By summarizing customer information (e.g., transactions with other banks) to make credit decisions, GenAI can help accelerate banks' end-to-end credit process. Once a credit decision is made, it is possible to draft a memorandum and credit contract. Financial institutions are using this technology to generate credit risk reports and extract customer details from credit memos. GenAI can source code and analyze credit data to gain insight into customers' risk profiles, and generate default and loss probability estimates through models.

Modeling and data analysis

GenAI can accelerate the migration of legacy programming languages, such as converting from SAS and COBOL to Python. It can also automate model performance monitoring and generate alerts if metrics fall outside tolerance levels. Companies are also using GenAI to draft model documentation and validation reports.

Warning Cyber security risks

By testing for cybersecurity vulnerabilities, GenAI can use natural language to generate code for detection rules and accelerate the development of secure code. This technology can also act as a virtual expert to investigate security data. On the other hand, GenAI can also optimize risk detection by accelerating code and synthesizing security insights and trends from security events and unusual behavior.

Climate Risk Analysis and Warning

As a code accelerator, GenAI can recommend code snippets, facilitate unit testing, and support physical risk visualization with high-resolution maps. It can automate data collection to assess counterparty transition risk and generate early warning signals based on trigger events. As a virtual expert, GenAI can automatically generate reports on environmental, social and governance (ESG) topics as well as fixed sections of annual reports

Talent requirements and operating models

Because GenAI is a transformational technology that requires changes in organizational structure, banks and financial institutions will need to understand the relevant staffing requirements. Banks can incorporate operating model changes into their culture and regular business processes. They can train new users not only on how to use GenAI but also on its limitations and strengths. Assembling a team of “GenAI experts” can help shape, build, and scale the adoption of this new technology.

In the future, GenAI is expected to support the entire risk and compliance function of banks. This implies that a profound cultural change will require all risk management professionals to become familiar with the new technology, its capabilities, its limitations, and how to mitigate the limitations. there. Using GenAI will be a significant change for all organizations, but those that navigate the delicate balance of harnessing the power of the technology while managing the risks it poses Significant productivity gains can be achieved.

Reference source: McKinsey & Company

Compiled by the DTSVN author group - Digital transformation solutions for the Finance and Banking industry.

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