Banking has an AI blind spot: the human intelligence gap

• Key insight: Banks are racing to adopt artificial intelligence while often de-emphasizing basic banking education. That's a recipe for disaster.
• Supporting data: In a January 2024 survey, 80% of respondents reported their bank did no derivative hedging to offset higher rates in 2023.
• Forward look: Banks seeking ROI from their increased investment in AI must pair it with renewed investment in HI, from new employees to the C-suite to the boardroom.
  

AI minus HI reduces ROI.

The banking industry's rush into artificial intelligence risks undercutting ROI without continued investment in what I think of as human intelligence, or HI.

AI is moving faster than banks are training those overseeing it, creating a troubling AI/HI gap in basic banking education from new employees to the boardroom.

The industry provides financial literacy for consumers, but what about in-house banking literacy?

This is not an anti-AI column, but a pro-HI one.

Full disclosure: I've taught banking and finance at Wharton for over 40 years. I'm also a dedicated AI user with multiple premium platform subscriptions.

Closing the AI/HI gap starts with basic banking and financial education and understanding AI's limits. AI can improve loan processing efficiency, but decisions on large commercial loans must rest with experienced officers. AI agents may recommend approval, but a seasoned lender, after meeting the borrower at their place of business and applying the traditional 5 C's of credit, may decline the credit.

Perhaps the strongest case for improving HI in risk management is the industry's current $327 billion in unrealized losses from underwater securities, down from over $600 billion at year-end 2022 due to rate moves, runoffs, and forced sales.

There were many warnings in 2021 and 2022 that post-pandemic record money supply growth and resulting inflation would push interest rates higher. One-fourth of the industry and many bond funds heeded this warning with derivatives. Yet, 75% of banks made no material use of derivatives as rates surged in 2021 and 2022.

Many banks hedged with matching maturities, floating-rate assets and other traditional techniques. But that doesn't explain hundreds of billions of unrealized losses.

In a subsequent January 2024 survey, 80% of respondents reported their bank did no derivative hedging to offset higher rates in 2023. Are these banks any better prepared today for increased rates?

Traditional and derivative interest rate risk, or IRR, management tools are taught in introductory banking and finance courses.

The issue is not whether every bank should use derivatives. It's whether management and boards have the HI to evaluate the full range of IRR tools and, when appropriate, use derivatives, even with outside expertise. Hundreds of billions of unrealized losses suggest this isn't the case.

How could such huge industry losses occur with multiple federal and state regulators constantly preaching the importance of IRR management, not to mention dozens of trade and other industry associations? And, what about our 4,000 degree-granting, two- and four-year colleges, almost one for every bank?

My Doubting Thomas answer is simple: The industry emphasizes eye-popping AI and other innovations over HI fundamentals. Not unlike my basketball team valuing dunks over perfecting layups, free throws and boxing out.

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I would respectfully suggest the industry balance its intense focus on AI with renewed investment in HI across three levels.

First are our future bankers who are equipped with the AI tools but not always basic banking and financial literacy HI tools. A refreshing exception is the annual CSBS Community Bank Case Study Competition, open to undergrads in any field of study. Each team partners with a local community bank to explore the impact of interest rates and inflation, with a focus on liquidity, technology and managing regulatory burden.

I had the privilege of working with the partnering bank and winning team from the University of Tennessee's Martin College of Business and Global Affairs, which beat 35 student teams representing 27 colleges and universities in the 2025 competition. These future bankers are well grounded in both AI and HI.

My second level of HI focus is the 75% of C-suite officers whose banks made little to no material use of derivatives, even if they employed traditional tools to manage post-pandemic IRR.

How did this happen with all the regulatory, industry and other available IRR educational resources? Having attended a few hundred industry conventions and meetings since 1970, I've concluded the main benefit of many of them is networking for bank employees and oftentimes regulators looking for better jobs. So-called "educational" conferences sponsored by private compliance firms often focus on selling their products and services.

Instead of industry conferences at luxury resorts, I prefer structured continuing education at specially designed, off-site, university programs. Some universities are affiliated with graduate schools of banking.

After six years training hundreds of C-suite banking officers through numerous custom-designed Wharton Executive Education programs, I concluded the most motivated students were hand-selected by their bank but also required to pay a portion of tuition. Skin-in-the-game education is most effective.

Bank boards represent my third and perhaps most serious level of concern. Having served on community bank boards and presented to several hundred as a consultant, I've found most directors are familiar with managing basic credit risks but not IRR. The role of directors is not to manage IRR but to oversee, question, and challenge management and, if necessary, bring in outside expertise.

This, however, was not done adequately by a large share of post-pandemic bank boards. Bank director attendance at industry conferences fell off after the pandemic, likely mimicking the national trend of a one-third decline from 2019 to 2022. But that "Covid ate my homework" excuse, probably wouldn't have made a difference.

Many of the pre-pandemic, director, education-credit seminars I attended were current event sessions by outside vendors promoting consulting and other services.

A preferred format is off-site, regulator-sponsored director seminars, which are primarily educational rather than transactional or social. Often held at regulators' offices, directors are more focused than at golf resorts, often with family in tow.

Building on that, in-person attendance at structured, off-site, regulator or university programs should be mandatory. Doctors and lawyers on bank boards have continuing education requirements. Bank directors should too.

Separately, in-person board attendance, at least quarterly, should also be required, because good board meetings are educational in themselves. If banks require employees back in the office, shouldn't directors show up too, at least quarterly?

HI created AI, but AI does not eliminate the need for HI. Banks seeking ROI from their increased investment in AI must pair it with renewed investment in HI from new employees to the C-suite to the boardroom.