AI-Driven Digital Twins in Financial Risk Mitigation Enhancement

In the dynamic world of finance, the integration of Artificial Intelligence (AI) and Digital Twin technology is transforming the way banks approach risk management.

Traditional parallel shock analyses, while useful, lack the ability to offer probability estimates of performance. This can lead to overestimation of performance and underestimation of risk exposure. However, AI combined with Digital Twin can maintain accuracy and security while utilizing predictive and inferential capabilities.

Digital Twin, a digital mirror replicating a system or process in a simulated realistic environment, offers the ability to perform various scenario and sensitivity analyses. This allows for more complex predictive analysis and a deeper understanding of possible outcomes.

One institution at the forefront of this innovation is ADVISORI, a company specializing in AI-supported credit risk management. They develop digital twins of compliance processes to simulate and optimize various scenarios in banking risk management.

The strategic integration of AI and Digital Twin models will provide banks with the accuracy and foresight needed to navigate the ever-evolving financial landscape. For instance, ADVISORI's AI can parse the universe of derivatives and calculate the best option to mitigate risks.

The potential impact of Digital Twin/AI solutions on banks' balance sheets is significant. A graph demonstrates a 400 basis point increase in the overall yield curve yielding a combined net interest income and change in security value of USD 45 million.

Moreover, companies can develop a nuanced, probabilistic view of possible outcomes instead of more constrained traditional analyses. Delfi, another company offering a combined Digital Twin/AI solution for risk management, provides this service. Delfi's output includes a probability distribution showing the likelihood of potential outcomes across the entire universe of realistic yield curve evolutions.

The combination of Digital Twin and AI models also allows for straightforward backtesting. Delfi's in-house AI, for example, recommended hedging solutions that would have converted a $2 billion loss into a $3.5 billion gain for Silicon Valley Bank's balance sheet in 2021.

AI advancements are not limited to risk management. They are also impacting areas such as fraud detection and customer service, further enhancing the efficiency and safety of the banking industry.

As the effectiveness and future competitiveness of banks depend on making critical decisions about AI implementation accurately and quickly, the adoption of Digital Twin and AI technology is becoming increasingly crucial. For those interested in experiencing the power of these solutions firsthand, Delfi offers a free account for users to access demo data and experience the benefits in real time.