Michelle W Bowman: Responsible innovation and financial inclusion

In her speech at the Federal Reserve Board's third annual Financial Inclusion Conference, Vice Chair Michelle W Bowman underlined the significance of financial inclusion in creating a robust and stable financial system that serves everyone. She emphasized that innovation is a crucial tool for banks in expanding access and fostering a more inclusive financial system.

Banks are central to financial inclusion efforts, with responsible innovation playing a pivotal role in developing a faster and more efficient banking and payments system. This not only reduces costs but also broadens product availability to underserved consumers and businesses, promoting market competition.

The Federal Reserve's role in promoting responsible innovation lies in creating a receptive environment for new ideas and technologies and providing clarity on expectations. However, banks themselves are best positioned to decide when and how to innovate, given their deep understanding of their customers, communities, and risk appetite.

Artificial intelligence (AI) is an increasingly important area of bank innovation, with the potential to widen access to financial services and help banks effectively reach low- and moderate-income consumers. AI can further expand access to credit for the un- or underbanked, for instance, by leveraging alternative data sources and refining creditworthiness assessments.

However, employing AI in credit-decision making presents more significant legal compliance challenges than other AI applications. Therefore, the primary objective is to support responsible AI innovation by establishing clearer guidance on the appropriate level of oversight for AI applications. This includes ensuring that supervisory guidance does not impede access to and implementation of innovation, considering the unique structure, business, and culture of smaller banks.

The Federal Reserve has prioritized work on AI within the Financial Stability Board's Standing Committee on Supervisory and Regulatory Cooperation. Earlier this month, the Financial Stability Board published a report, "Sound Practices for Responsible Adoption of Artificial Intelligence (AI)," offering practical guidance on adapting to specific circumstances and use cases without prescribing one-size-fits-all requirements.

The report, subject to public comment through July 22, reflects the ongoing commitment to maintaining an open dialogue between banks and regulators to ensure an adaptive approach to innovation while safeguarding safety and soundness.