5 Predictions for Model Risk Management and AI Risk in 2025

What’s next for model risk and AI risk management in 2025? The pace of AI innovation is reshaping everything from risk management to compliance in financial services. With new regulations on the horizon, the financial industry faces unprecedented opportunities—and risks—in managing artificial intelligence. Kristof Horompoly, Head of AI Risk Management at ValidMind, shares his insights on what these AI advancements mean for the sector.

Increased Regulatory Scrutiny on AI Models:

This year, we saw several AI-related regulations enacted, including the EU AI Act. In 2025, expect regulatory bodies to implement more stringent guidelines specifically targeting AI and machine learning models. Financial institutions will be required to demonstrate not only the transparency and fairness of these models but also prove their ability to maintain control over complex, autonomous AI systems, including models used in generative AI.

Expansion of AI-Specific Validation Frameworks:

Traditional model validation frameworks will evolve to incorporate AI-specific risks such as bias, interpretability, and robustness. Financial institutions will increasingly adopt validation frameworks designed to assess and monitor AI models across their entire lifecycle, from development to deployment, ensuring these models remain compliant and reliable in dynamic environments.

Proliferation of AI-driven MRM Automation:

The use of AI to validate other AI models will become a standard practice, leading to a rise in AI-driven model risk management platforms. These tools will automate many aspects of model validation, including stress testing, risk scoring, and performance monitoring, enabling firms to scale their MRM practices more efficiently.

Real-Time Risk Monitoring and Reporting:

By 2025, the demand for real-time monitoring and dynamic reporting of model risk will grow. AI-based tools will allow financial institutions to continuously track and report on the performance and risks of their models in production, enabling quicker responses to model drift, regulatory changes, or shifts in market conditions.

Evolution from Responsible AI in Risk Management to an Emphasis on Governance:

While responsible AI will remain a focus area in model risk management, with institutions expected to ensure that AI models are transparent, fair, and accountable, expect the emphasis to evolve to focus on AI governance. Moreover, by 2025, banks are expected to establish comprehensive AI governance frameworks that integrate regulatory compliance, ethical considerations, and operational oversight, ensuring that AI systems are managed effectively throughout their lifecycle.