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The AI advantage: How financial institutions are staying ahead of risks

By Perle Systems
May 5, 2023

As of 2021, $486.6 trillion was held in assets by financial institutions worldwide, per Statista. That's too much money to chance losing, so financial institutions that are responsible for directing capital have to properly manage risks. A company's operations, finances or reputation may be adversely affected by internal or external threats, hence the need for risk management — the discovery, evaluation and control of risks.

Considering the importance of risk management, financial institutions have to utilize all resources available to address it, especially those that simplify and enhance employees' work processes. Forbes noted that 85% of financial institutions currently use artificial intelligence (AI) in some capacity, including for risk management.

But how are financial institutions using AI to manage risks, and is their use of the technology effective? Let's take a look.

AI tools used in finance and risk management

Fraud detection: To stop financial losses due to fraud, financial institutions use AI algorithms to examine transaction data and spot patterns of fraudulent activity.

Credit risk analysis: AI algorithms can analyze credit data and help evaluate the creditworthiness of borrowers.

Trading: AI-driven algorithms can also assess market data and carry out deals automatically to enhance efficiency and optimize trading methods.

Portfolio optimization: To maximize investment portfolios and lower risk while boosting returns, financial institutions rely on AI algorithms to examine historical data and market patterns.

Robo-advising: Financial institutions are embracing robo-advising to offer clients individualized investment advice and financial planning services based on their unique risk tolerance and financial goals.

Regulatory compliance: Banks leverage AI algorithms to analyze vast volumes of data and spot potential infractions to comply with complex regulatory standards.

Business woman analysing statistics on laptop.Managing financial risks has become easier with AI.

The top 3 most important risk management areas that would benefit from AI

While some banks are already leveraging AI to manage risks, there are key risk areas in the industry that need more attention. According to Infopulse, these include:

  • Data quality: Inaccurate risk assessments can result from poor data quality, which may lead to poor business decisions. AI assists in identifying and resolving data problems, lowering the possibility of making erroneous judgments and conclusions.
  • Stress testing: Stress testing replicates various situations to find potential flaws and get ready for unforeseen events that could lead to the loss of money or reputation. AI-powered simulations help businesses manage this risk more successfully by analyzing vast volumes of data to spot possible threats and weak points.
  • Early warning systems: When risks are not recognized and dealt with promptly, they can grow and become significant problems. With AI, early warning systems analyze massive volumes of data in real time, enabling decision-makers to spot threats and take action before they materialize into serious issues.

Advantages of using AI to manage risks

It's safe to say the advantages outweigh the cons when it comes to financial institutions' use of AI to manage risks. AI has helped to improve:

  • Decision-making
  • Accuracy
  • Efficiency
  • Risk assessment
  • Scalability
  • Cost savings
  • Investment evaluation
  • Loan and facility evaluation

Partner with Perle to leverage the power of AI to manage risks

Perle Systems encourages the use of AI to streamline business processes, such as risk management. Moreover, we specialize in hardware and software solutions for the finance sector. Contact us to find out more.


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