Credit Risk and Artificial Intelligence: On the Need for Convergent Regulation

10 Pages Posted: 27 Nov 2023

See all articles by Cristián Bravo

Cristián Bravo

Western University, Canada

Raffaella Calabrese

University of Edinburgh - Edinburgh Business School

Stefan Lessmann

School of Business and Economics, Humboldt-University of Berlin

Christophe Mues

University of Southampton

María Óskarsdóttir

Reykjavik University

Date Written: October 27, 2023

Abstract

Credit risk is probably the most regulated application field of statistical learning models worldwide, with a strong body of regulations encompassed in the Basel Accords. As the use of machine learning and Artificial Intelligence models (AI) is becoming more widespread, entities worldwide, including the European Banking Authority and local regulators in Canada, Germany, and the UK, have released opinion papers or put forward proposals on how the new regulations will need to adapt to accommodate AI tools in banking for credit risk modelling and management. These regulatory proposals, which have identified credit risk as a high-risk application area of AI, have shown a significant divergence in their views, which goes against the idea of the Basel regulations as a unifying framework. In this opinion paper, we discuss the current proposals for regulatory oversight of credit risk models in Canada, the European Union, the United Kingdom, and the United States, and show where they diverge and where they coincide. We also motivate and discuss the urgent need for the development of a unified framework, as new laws regulating AI will certainly clash with current banking regulations and initiate a first discussion on making these proposals convergent.

Keywords: Credit Risk, Artificial Intelligence, Banking Regulation

JEL Classification: G32, G28, E58

Suggested Citation

Bravo, Cristián and Calabrese, Raffaella and Lessmann, Stefan and Mues, Christophe and Óskarsdóttir, María, Credit Risk and Artificial Intelligence: On the Need for Convergent Regulation (October 27, 2023). Available at SSRN: https://ssrn.com/abstract=4615412 or http://dx.doi.org/10.2139/ssrn.4615412

Cristián Bravo (Contact Author)

Western University, Canada

1151 Richmond Street
London, ON N6A 5B7
Canada

HOME PAGE: http://www.uwo.ca

Raffaella Calabrese

University of Edinburgh - Edinburgh Business School ( email )

29 Buccleuch Pl
Edinburgh, Scotland EH8 9JS
United Kingdom

Stefan Lessmann

School of Business and Economics, Humboldt-University of Berlin ( email )

Unter den Linden 6
Berlin, Berlin 10099
Germany

Christophe Mues

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

María Óskarsdóttir

Reykjavik University ( email )

Ofanleiti 2
Reykjavik, 103
Iceland

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