AI Governance Challenges in Banking: Model Explainability, Regulatory Compliance, and the Limits of Traditional Risk Management

Afsara Tasnim Shama

doi:10.25163/business.3110901

Business and Social Sciences

Business and social sciences | Online ISSN 3067-8919

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Volume 3 Number 1 2025

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AI Governance Challenges in Banking: Model Explainability, Regulatory Compliance, and the Limits of Traditional Risk Management

Afsara Tasnim Shama ¹*

+ Author Affiliations

Business and Social Sciences 3 (1) 1-8 https://doi.org/10.25163/business.3110901

Submitted: 30 December 2024 Revised: 05 March 2025 Published: 11 March 2025

Abstract

Background: Artificial intelligence has reshaped how banks detect fraud, price credit, and make decisions at a pace few risk frameworks were ever built to handle, and the governance gap this leaves behind is not yet well understood empirically (Truby et al., 2020; Lee et al., 2021).

Methods: A quantitative, cross-sectional survey was administered to 155 professionals drawn from commercial banks, fintech firms, regulatory bodies, AI technology providers, and academia, following an initial distribution of 170 questionnaires (91.2% valid response rate). Six governance constructs — Model Explainability, Regulatory Compliance, Data Governance, Algorithmic Bias, Model Risk, and Cybersecurity Risk — were measured on five-point Likert scales and analyzed in IBM SPSS Statistics 29 using descriptive statistics, Pearson correlation, and multiple linear regression, with multicollinearity assessed via tolerance and VIF.

Results: Model Explainability emerged as the most influential predictor of perceived governance challenges (β = 0.318, r = 0.756, p < .001), followed by Regulatory Compliance (β = 0.264, r = 0.704, p < .001) and Data Governance (β = 0.213, r = 0.671, p = .001). Algorithmic Bias, Model Risk, and Cybersecurity Risk contributed smaller but statistically significant effects. The six-predictor model explained 71.4% of the variance in governance challenges (R² = .714, adjusted R² = .702, F = 61.84), with no evidence of multicollinearity (VIF 1.45–1.92) or autocorrelation (Durbin–Watson = 1.95).

Conclusion: Traditional, financially-oriented risk management frameworks appear insufficiently equipped to govern algorithmic decision-making in banking; explainability and regulatory alignment, rather than technical risk controls alone, seem to anchor perceived governance adequacy. Integrated AI-specific governance frameworks are warranted.

Keywords: Artificial Intelligence Governance; Banking Risk Management; Model Explainability; Regulatory Compliance; Algorithmic Accountability

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Business and Social Sciences

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AI Governance Challenges in Banking: Model Explainability, Regulatory Compliance, and the Limits of Traditional Risk Management

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