Quantitative Supervision Research Paper Highlights
Our Financial Economists produce empirical research that advances our understanding of the risks faced by banks and other financial institutions. Below are articles that describe some of our recent research. You can also review the Research that our team produces.
Banking is evolving as financial institutions reshape their branch networks. New research shows that while banks are closing branches in areas with more financially sophisticated customers who are comfortable with digital banking, they're also strategically opening new branches in these same areas to attract deposits away from competitors. This pattern highlights the changing role of physical locations in modern banking.
The rapid advancement and widespread adoption of artificial intelligence (AI) has fundamentally transformed how firms operate across industries. In the U.S. banking sector, AI applications range from customer service and fraud detection to trading and risk management. Prior research has shown that AI can boost sales, innovation, and product quality. However, there is surprisingly little evidence that it improves operational efficiency. This raises a key question: what are the hidden costs?
Our research finds that these benefits are accompanied by significant operational risks that demand careful management. Banks with higher AI intensity incur greater operational losses than their less AI-intensive counterparts. This relationship is primarily driven by losses due to external fraud, problems with clients/customers, and system failures. AI’s negative effect is especially pronounced for banks that lack strong risk management, suggesting that robust internal control is an important prerequisite for successful AI implementation. In this Paper Highlight, we present the findings of our related research paper and implications for bank management and banking supervision.