On December 5, the Deputy Comptroller for Compliance Policy and Acting Deputy Comptroller for the Office of Financial Technology Donna Murphy testified on the activities and initiatives of the Office of the Comptroller of the Currency’s (OCC) Office of Financial Technology before the Subcommittee on Digital Assets, Financial Technology and Inclusion, Committee on Financial Services of the U.S. House of Representatives.

Murphy’s testimony emphasized the agency’s focus on new and changing technologies such as fintech partnerships, digital assets, and artificial intelligence (AI).

We found her comments on AI particularly interesting as we have already identified bank use of AI as an area of risk and compliance focus for 2024. Doran Jones will publish a series of articles on the subject in the new year. Murphy indicated that “the OCC remains focused on the potential risks of adverse outcomes if bank use of AI is not properly managed and controlled. Potential adverse outcomes can be caused by poorly designed underlying mathematical models, faulty data, changes in model assumptions over time, inadequate model validation or testing, or limited human oversight. Key risks include a lack of explainability of outcomes, bias or inaccuracies due to poor quality data or data management, failure to preserve consumer privacy and data security, and risks resulting from reliance on third party vendors if banks do not implement an effective third-party risk management program. The OCC continues to conduct robust, risk-based supervision, monitor the industry, and conduct research efforts to ensure that the agency keeps pace with changes in AI use in the financial sector.”

On December 7, the OCC released its Semiannual Risk Perspective for Fall 2023, reporting on the key issues currently facing the federal banking system. The report highlights artificial intelligence (AI) in banking as an emerging risk. While acknowledging the benefits of AI for reducing costs and increasing efficiencies, the report stated that AI “may also present significant challenges relating to compliance risk, credit risk, reputation risk, and operational risk.”

The OCC pointed out that banks need to “identify, measure, monitor, and control risks arising from AI use” and that “the OCC will continue to monitor this rapidly evolving area, including generative AI use.”

The report also identified the following key risk themes:

  • Credit risk is increasing due to higher interest rates, inflation, declining corporate profitability, commercial real estate lending, and the potential for slower economic growth.
  • Rising deposit rates, reduced liquidity and higher cost wholesale funding started to impact banks’ net interest margins and investment portfolio values.
  • Operational risk is increasing due to Cyber threats and technology innovations that can “heighten risk of fraud and error”.
  • Compliance risk remaining elevated due to the heightened regulatory focus on consumer fairness; rapidly changing technology; increased third party partnerships; and increased Bank Secrecy Act/Anti-Money Laundering risks.

The report indicated that, while open Matters Requiring Attention (MRAs) were slightly lower for operational and compliance risks in the third quarter of 2023 compared to the same period in 2022, there were significant increases in open MRAs related to liquidity and interest rate risks.

  • On December 7, the Consumer Financial Protection Bureau (CFPB) ordered Atlantic Union Bank of Richmond, Virginia, to pay $6.2 million for illegal conduct related to overdraft fees. The bank was ordered to make restitution of $5 million to customers and pay a fine of $1.2 million for charging fees without proper consent and misleading customers about the terms and costs of overdraft coverage.

Contact us to learn how a strategic partnership with Doran Jones can provide you with cost-effective solutions by leveraging our expertise with these and other critical risk and compliance functions.