#Grok #ChatGPT: On the Basel Committee's bank capital/equity requirements: Where have all economists gone? Long time passing.
I asked: "Briefly, with decades of lower bank capital requirements against public debt and residential mortgages than against loans to small businesses and entrepreneurs, what should an economist expect would happen?"
Grok answered:
An economist would expect:
Increased Lending to Public Debt and Mortgages: Lower capital requirements reduce the cost of holding government bonds and residential mortgages, leading banks to allocate more capital to these assets.
Reduced Lending to Small Businesses and Entrepreneurs: Higher capital requirements for loans to small businesses and entrepreneurs make them less attractive, resulting in reduced credit availability for these sectors.
Asset Price Inflation in Housing: Increased mortgage lending fuels demand for housing, driving up property prices.
Economic Imbalance: Over-reliance on public debt and real estate lending can crowd out productive investment in small businesses, stifling innovation and economic dynamism.
Systemic Risk: Concentration of bank assets in government bonds and mortgages increases vulnerability to sovereign debt crises or housing market downturns.
Wider Inequality: Easier access to mortgage credit benefits wealthier households, while small businesses, often owned by less affluent entrepreneurs, face credit constraints, exacerbating wealth gaps.
ChatGPT answered:
An economist should expect that, over decades, lower bank capital requirements for public debt and residential mortgages would systematically incentivize banks to favor these assets over riskier ones like small business or entrepreneurial loans. The likely outcomes include:
Credit misallocation: Excessive lending to housing and government sectors, underinvestment in productive, growth-generating activities.
Asset inflation: Higher house prices and potential housing bubbles due to overfunding of mortgages.
Weaker innovation and productivity: Undersupply of capital to entrepreneurs and small businesses, which are key drivers of innovation and job creation.
Higher systemic risk: Apparent safety of low-capital assets can mask concentration risks and reduce financial system resilience.
Overall, this policy bias distorts market signals and impairs long-term economic dynamism.
Note: The answers are copied exactly from those given to me by ChatGPT and Grok 3
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