The US banking sector is exhibiting an unexpected appetite for AI regulation, with nearly a quarter of senior compliance leaders wanting regulation to come first, followed by innovation. This is in contrast to their European counterparts, who are more likely to favor innovation leading the way. The difference in approach stems from the traditional regulatory frameworks in the two regions.
US Regulatory Tradition
In the US, the regulatory tradition is based on prescriptive rulemaking, where regulators provide detailed guidelines for banks to follow. This approach has been in place for decades, with the 2011 SR 11-7 rules being a prime example. These rules dictated how banks should govern AI models used in fraud detection and compliance, and they became the global gold standard for model risk management. However, this tradition may be reaching its limits, as the rapid evolution of AI technology is making it challenging for regulators to keep pace.
The US federal regulators’ revision of SR 11-7 in April 2026 explicitly excluded generative and agentic AI from its scope, highlighting the uncertainty surrounding AI regulation. The current administration has also revoked existing AI safety frameworks, adding to the confusion. As a result, the US financial sector is facing a crisis of confidence in the regulatory framework, with many bankers seeking clearer guidelines on how to manage AI risk.
European Regulatory Approach
In contrast, the European regulatory approach is based on a principles- and risk-based philosophy. This approach emphasizes the importance of scaling oversight t. However, the EU AI Act has deviated from this tradition by attempting to pin down a rapidly evolving technology. The results have been disappointing, with the European Commission missing deadlines for providing guidance on high-risk AI systems and enforcement being pushed back to December 2027.
The EU AI Act’s prescriptive approach has been criticized for being too rigid and inflexible, failing to account for the speed and complexity of AI development. The act’s failure to provide clear guidance has led to confusion and uncertainty among businesses and regulators alike. As the EU’s FCA Chief Executive Nikhil Rathi noted, AI is a technology where ‘the frontier is moving every three to six months,’ making it challenging to create effective regulations.
Need for a New Regulatory Paradigm
The current regulatory frameworks in both the US and Europe are struggling to keep pace with the rapid evolution of AI technology. The traditional approach of prescriptive rulemaking is no longer effective, as it fails to account for the speed and complexity of AI development. A new regulatory paradigm is needed, one that is continuous, adaptive, and built for the speed of AI rather than the speed of legislation.
This new paradigm would require a fundamentally different relationship between regulators and the regulated, one that is based on collaboration, trust, and a deep understanding of the technology. Regulators would need to be more agile and responsive, able to adapt quickly to changing circumstances and provide clear guidance on managing AI risk. The regulated would need to be more transparent and forthcoming, providing regulators with the information they need to make informed decisions.
What Should You Do About AI Regulation?
So, what can you do about AI regulation? First, it’s essential to stay informed about the latest developments in AI regulation and the evolving landscape. Second, you should be prepared to adapt quickly to changing circumstances, as the regulatory framework is likely to continue to evolve. Third, you should prioritize transparency and collaboration, working closely with regulators and other stakeholders to ensure that your organization is well-positioned to manage AI risk.
Ultimately, the key to effective AI regulation is finding a balance between innovation and oversight. By working together and adopting a more adaptive and collaborative approach, we can create a regulatory framework that supports the development of AI while minimizing its risks. As the US and European regulators continue to grapple with the challenges of AI regulation, one thing is clear: the current approach is no longer sufficient, and a new paradigm is needed to ensure that AI is developed and deployed in a responsible and beneficial manner.
The answer is neither an innovation-led approach nor a regulation-first model but a fundamentally different relationship between regulator and regulated, one that is continuous, adaptive and built for the speed of AI rather than the speed of legislation.
AI Regulation – Disclaimer
This article does not replace professional advice from a financial advisor or regulator. Outcomes may vary depending on individual circumstances. Consult a qualified professional for specific guidance on AI regulation and its implications for your organization.
Frequently Asked Questions
Related Articles
