Federal Reserve Board Governor Barr calls on community banks to manage AI and third-party risks and opposes proposed rollbacks for large banks

The Federal Reserve Board published remarks by Governor Michael S. Barr outlining how technology, including artificial intelligence, is reshaping community banking and raising new operational, fraud, and cybersecurity risks. Barr argued that community banks’ relationship banking and local “soft information” remain a competitive advantage, but said institutions will need to adopt technology in ways that deepen rather than replace customer relationships. Barr pointed to the Conference of State Bank Supervisors’ annual survey in which “technology and related costs” ranked second among concerns behind cybersecurity, and noted increased competitive pressure from nonbank payment services firms and larger banks’ online channels. He highlighted community banks’ reliance on third-party service providers and the burden of third-party risk management, referencing existing supervisory guidance intended to support more predictable supervision. On AI, he described potential use cases such as lower-cost customer support and more feasible automated fraud detection as AI capacity expands, while warning that generative AI is also enabling “deepfakes” and fully forged identities that can be used to defraud banks and customers; he cited estimates that cybercrime costs have risen from 1 percent to 10 percent of global gross domestic product and referenced rapid growth in deepfake attacks over recent years. Barr also warned that AI-driven economic disruption could affect communities’ employment base even as data center investment may create new local credit needs, and he criticised recent proposed rollbacks in capital standards, the supervisory framework, and stress testing rigor for the largest banks as potentially eroding post-2008 safeguards.