Operationalizing AI risk frameworks in financial services: A second line of defense perspective
Toyota Financial Services, USA.
Review Article
World Journal of Advanced Research and Reviews, 2023, 20(01), 1436–1446
Publication history:
Received on 16 September 2023; revised on 25 October 2023; accepted on 28 October 2023
Abstract:
The proliferation of artificial intelligence systems within financial services organizations has created unprecedented challenges for second line of defense risk oversight functions tasked with providing independent risk assessment while enabling innovation. This research addresses the critical gap between theoretical AI risk frameworks and their operational implementation by examining 150 financial institutions across banking, insurance, and investment sectors. Through a comprehensive mixed-methods study combining quantitative analysis of AI risk assessments and qualitative interviews with 78 2LOD practitioners, this article develops a maturity model for AI risk governance and introduces the Transverse AI Risk Assessment Methodology (TARAM). The study reveals that 73% of financial institutions lack integrated approaches to AI risk management, treating technology, data, operational, and compliance risks in isolation despite their interconnected nature. TARAM addresses this deficiency by providing a unified framework that enables simultaneous assessment across all risk domains while maintaining regulatory compliance with SOX, GDPR, NYDFS, and emerging AI-specific regulations. Empirical validation demonstrates that organizations implementing TARAM achieve 47% faster AI use case approval times, 62% reduction in post-deployment risk incidents, and 89% improvement in regulatory examination outcomes. The research contributes novel risk categorization frameworks that balance innovation velocity with risk appetite, practical guidance for integrating AI-specific controls into SDLC processes, and actionable strategies for 2LOD functions to provide effective oversight without impeding business objectives. This work bridges the critical divide between high-level governance principles and day-to-day operational risk management, offering financial services organizations a pragmatic pathway to realize AI's transformative potential while maintaining robust risk oversight.
Keywords:
Artificial Intelligence Risk Management; Second Line of Defense; Financial Services Governance; Transverse Risk Assessment; Regulatory Compliance; AI Use Case Categorization; Risk Maturity Model
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Copyright © 2023 Author(s) retain the copyright of this article. This article is published under the terms of the Creative Commons Attribution Liscense 4.0