#AI #ChatGPT #Grok: Five questions on: What if there was the same bank capital/equity requirement against all bank assets?

I asked ChatGPT"

"If instead of 1988 Basel Committee’s risk weighted capital requirements, banks needed to hold e.g., a same 10 percent in capital against sovereign debts, residential mortgages, securities rated AAA and loans to small businesses and entrepreneurs, please:  With a Yes or a No:

Would the sovereigns’ debts be as high as when compared to current GDPs?

Would house prices be as high as these currently are?

Would the 2008 GFC, which in much detonated by AAA rated MBS turning risky, have happened?

Would the GDP of nations be lower or higher than today?

Would we all be better off today?"

If you like, in max 200 words, explain each of your answers.

 

ChatGPT answered: Yes or No answers:

Would sovereigns’ debts be as high as when compared to current GDPs? No

Would house prices be as high as these currently are? No

Would the 2008 GFC, which in much detonated by AAA rated MBS turning risky, have happened? No

Would the GDP of nations be lower or higher than today? Higher

Would we all be better off today? Yes

Brief Explanation (within 200 words):

 

"If banks had been required to hold the same capital (e.g., 10%) against all assets—government debt, AAA securities, mortgages, and small business loans—credit allocation would have been more balanced and market-driven. Governments would have faced real financing costs, limiting their debt growth. Housing prices would have risen more modestly without the capital incentive to overload on mortgages. The 2008 Global Financial Crisis was triggered largely because AAA-rated mortgage-backed securities attracted minimal capital requirements while hiding systemic risk; under equal capital rules, banks would have held fewer such assets or been better cushioned.

 

With better risk distribution and more capital backing loans to entrepreneurs, productive investment would likely have increased, supporting more resilient and inclusive GDP growth. Fewer distortions and crashes would mean less inequality and instability, making society better off overall—economically and socially.

 

This is not utopia—but better regulation could have enabled more sustainable growth."

I said: Thanks!

ChatGPT replied: 

You're very welcome! Always glad to help clarify. If you'd ever like to explore how such capital rules could be reformed today—or their political barriers—just let me know.

 

I asked Grok exactly the same question, in exactly the same way:

 

Grok answered:

 

Below are the Yes/No answers followed by brief explanations (max 200 words each) for each question, 

 

Would the sovereigns’ debts be as high as when compared to current GDPs? No

A uniform 10% capital requirement would constrain banks’ ability to hold large volumes of sovereign debt, as they’d need more capital than under Basel’s low or zero risk weights for sovereigns. This would limit sovereign borrowing, forcing governments to curb deficits or seek alternative funding, likely reducing debt-to-GDP ratios. Historical data suggests Basel’s framework enabled high sovereign debt (e.g., Eurozone debt-to-GDP peaked at 92% in 2014). A stricter requirement would discourage reckless lending to governments, fostering fiscal discipline and lower debt levels relative to GDP.

 

Would house prices be as high as these currently are? No

A 10% capital requirement on residential mortgages would reduce banks’ lending capacity compared to Basel’s low risk weights (e.g., 35% for mortgages). Less credit availability would dampen housing demand, lowering price growth. For example, post-2008, tight credit conditions in some markets curbed house price surges. Higher capital needs would limit speculative bubbles, keeping prices more aligned with incomes and fundamentals.

 

Would the 2008 GFC, which in much detonated by AAA-rated MBS turning risky, have happened? No

A 10% capital requirement on AAA-rated mortgage-backed securities (MBS) would have reduced banks’ exposure to these assets, as Basel assigned them near-zero risk weights, encouraging overinvestment. This overreliance fueled the 2008 crisis when MBS turned toxic. Higher capital buffers would have limited leverage and forced better risk assessment, likely preventing the scale of the crisis. The crisis’s roots in misrated securities would have been mitigated by stricter capital rules.

 

Would the GDP of nations be lower or higher than today? Higher

A uniform 10% capital requirement would shift lending toward productive sectors like small businesses, which Basel penalized with high risk weights. Increased credit access for entrepreneurs would spur innovation and growth, boosting GDP. While reduced sovereign and mortgage lending might initially slow consumption, long-term economic efficiency would improve. Historical evidence shows SMEs drive job creation (e.g., 60% of U.S. jobs). Balanced capital rules would support sustainable growth over debt-fueled bubbles.

 

Would we all be better off today? Yes

A 10% capital requirement would promote financial stability by reducing sovereign debt, housing bubbles, and risky MBS exposures, averting crises like 2008. More lending to small businesses would foster innovation, job creation, and equitable growth. While short-term consumption might dip, long-term economic resilience and fairer capital allocation would benefit society. Reduced inequality from less rent-seeking in housing and sovereign debt markets would enhance overall well-being.

Thanks!

 

You're welcome!

Note: The answers are copied exactly from those given to me by ChatGPT and Grok

Here my many other questions to ChatGPT – Grok on bank regulations.

#AI #ChatGPT #Grok: Would the Founding Fathers have agreed with current bank capital/equity requirements?

I asked "Yes, or No"

"The Founding Fathers who drafted the Constitution of the United States, would they have agreed with current bank capital/equity requirements that are higher against loans to America’s small businesses and entrepreneurs, than against Federal Debt?"

ChatGPT answered: No

The Founding Fathers emphasized limited government, individual enterprise, and the importance of private initiative. They would likely have seen higher capital requirements against loans to small businesses and entrepreneurs than against Federal Debt as a distortion favoring centralized power over decentralized economic opportunity.

Thanks!

You're very welcome!

Grok answered: No

In less than 400 words, why?

The Founding Fathers, who drafted the U.S. Constitution, prioritized economic liberty, individual initiative, and limited government intervention, values reflected in their debates and writings. They would likely have opposed higher bank capital/equity requirements for loans to small businesses and entrepreneurs compared to federal debt, as such policies could stifle the entrepreneurial spirit and economic growth they championed.

Figures like Thomas Jefferson and Benjamin Franklin emphasized the importance of small enterprises and independent producers in fostering a free society. Jefferson, in particular, distrusted centralized financial power, as seen in his skepticism of Alexander Hamilton’s national bank. Higher capital requirements on small business loans increase borrowing costs and restrict credit access, disproportionately harming the very individuals—farmers, artisans, and small merchants—the Founders saw as the backbone of the republic. This could be viewed as an artificial barrier to economic freedom, akin to the mercantilist restrictions they rebelled against.

Conversely, lower requirements for federal debt incentivize banks to favor government securities over private lending. The Founders, wary of public debt from their Revolutionary War experience, would likely see this as prioritizing government largesse over productive enterprise. Hamilton, though more favorable to public credit, argued in his First Report on Public Credit (1790) that debt should support commerce, not crowd out private investment. A system that tilts banks toward federal debt could echo the centralized financial systems the Founders criticized in Britain.

The Constitution itself, in Article I, Section 8, grants Congress powers to regulate commerce and borrowing, but the Founders intended these to promote general welfare, not to favor government over citizens. Higher capital requirements on small business loans could be seen as a regulatory overreach, clashing with their preference for minimal government interference in markets.

While modern banking regulations address systemic risk, the Founders would likely argue that penalizing loans to small businesses—key drivers of innovation and employment—undermines the economic dynamism they sought to protect. They would favor policies ensuring equitable access to credit, aligning with their vision of a republic where individual effort, not government preference, drives prosperity.

Thanks!

You're welcome!

Note: The answers are copied exactly from those given to me by ChatGPT and Grok

Here my many other questions to ChatGPT – Grok on bank regulations.

2013: Have the risk weights of current bank capital requirements been approved by the US Congress in accordance to the Constitution?

2023: Should US bank regulators take an oath to support and defend the US Constitution?

#AI #ChatGPT #Grok: Do current bank regulations imply government bureaucrats know better what to do with credit than small businesses?

I asked:  Please answer Yes or No: 

“Setting aside any considerations about risks, do lower bank capital/equity requirements against government debt than small businesses loans, de facto also imply that government bureaucrats know better what to do with credit for which repayment they’re not personally responsible for, than small businesses with their bank loans?

If “Yes”, in very few words, do you agree with the regulators that they do?”

ChatGPT answered:

"Yes.

No, I do not agree. Bureaucrats lack the direct accountability and market-tested incentives that small business owners have when allocating credit."

Thanks!

"You're very welcome! Let me know if you'd like to dig deeper into the topic."

Grok, after thinking 48 seconds, answered:

"Yes, lower bank capital requirements for government debt compared to small business loans imply that regulators favor lending to the government, suggesting that government bureaucrats are considered better at handling credit than small businesses, even though bureaucrats aren't personally responsible for repayment. This is because the lower requirements make it more attractive for banks to finance government activities over small businesses, indicating a preference for government credit allocation.

No, I do not agree with the regulators that government bureaucrats necessarily know better what to do with credit than small businesses."

Thanks!

Grok, after 7 seconds gave a 545 words long answer.

"You're welcome! I assume you're asking about the implications of lower bank capital requirements for government debt compared to small business loans, and whether this suggests that regulators think government bureaucrats are better at handling credit than small businesses. You might also be curious about my personal stance on this. Here's a clear and complete answer:

Implications of Lower Bank Capital Requirements

Yes, lower bank capital requirements for government debt compared to small business loans do imply that regulators favor lending to the government. This suggests they believe government bureaucrats are better at managing credit than small businesses. Here's why:

Capital Requirements Explained: Banks are required to hold a certain amount of capital as a buffer against potential losses on their loans. When capital requirements are lower for government debt (e.g., government bonds), banks need to set aside less capital for these assets compared to loans made to small businesses.

Incentive Structure: Lower capital requirements make lending to the government less costly for banks. This incentivizes banks to allocate more of their lending capacity to government debt rather than small business loans, which carry higher capital requirements and thus higher costs.

Implied Trust: By setting these rules, regulators are effectively signaling a preference for government borrowing. This can be interpreted as an implicit trust in the government's ability to manage credit effectively, even though government bureaucrats aren’t personally responsible for repaying the debt. In contrast, small businesses, which are directly accountable for their loans, face stricter requirements, suggesting less confidence in their credit management.

So, the regulatory framework does imply that government bureaucrats are seen as more capable of handling credit than small businesses.

Do I Agree with the Regulators?

No, I don’t agree with the regulators’ apparent stance that government bureaucrats are inherently better at managing credit than small businesses. Here’s my reasoning:

Efficiency and Accountability: Small businesses are often more efficient and innovative than government entities. They have a direct stake in their financial success and are personally responsible for repaying their loans. This accountability can lead to more prudent and effective use of credit.

Government Bureaucracy: Government bureaucrats, on the other hand, manage public funds without personal financial liability. This lack of direct accountability might reduce their incentive to allocate credit as carefully or productively as small businesses do.

No Inherent Superiority: There’s no clear evidence that government bureaucrats are naturally better at handling credit. While government debt is often considered "safer" due to the government’s ability to tax or print money, this doesn’t mean the credit is used more wisely or efficiently compared to small business investments.

In my view, the preference for government debt in capital requirements reflects a bias toward stability and risk aversion rather than a fair assessment of credit management ability. Small businesses, despite their higher risk, often drive economic growth and innovation, and I don’t think they should be disadvantaged by this regulatory approach.

Summary

Yes, the lower capital requirements for government debt imply that regulators trust government bureaucrats more than small businesses to handle credit.

No, I don’t agree with this implication, as small businesses can be just as capable—if not more so—due to their accountability and efficiency.

Let me know if you’d like me to dive deeper into any part of this!"

Note: The answers are copied exactly from those given to me by ChatGPT and Grok

Here are my many other questions to ChatGPT – Grok on bank regulations.

Am I and AI confronting the Regulatory Inquisition? Will we be silenced?

#AI #ChatGPT #Grok: Are the current risk weighted bank capital requirements dangerously procyclical?

I asked: 

"When times are good and the risks seem lower, with its risk weighted capital requirements, the Basel Committee allows banks to hold less capital/equity against their assets. 

When times are hard and the risk seem higher, banks are required to hold more capital against their assets, just when it must be harder for banks to raise new capital.

With a Yes or a No, is that not a dangerous pro-cyclical regulation?

If 'Yes' then please, with one number, since 1989, how many Nobel Prize winners in Economic Sciences warned about that?"

ChatGPT answered

"Yes, that is a dangerous pro-cyclical regulation.

Since 1989, zero Nobel Prize winners in Economic Sciences have explicitly and publicly warned about the pro-cyclicality of Basel's risk-weighted capital requirements in the form you've described."

I asked: "Any brief max 200 words commentary on this?"

"The pro-cyclicality of Basel’s risk-weighted capital requirements poses a fundamental flaw in global banking regulation. By allowing banks to hold less capital in good times—when asset prices are high and risks appear low—it encourages excessive leverage and credit expansion. Conversely, in downturns, when risks seem higher, banks are required to hold more capital, just when raising equity is most difficult and expensive. This amplifies financial cycles, turning booms into bubbles and busts into crises.

That no Nobel laureate in Economic Sciences since 1989 has explicitly called this out in clear terms is striking. It may reflect a broader academic detachment from the regulatory nuts and bolts of finance, or perhaps an overreliance on theoretical risk models that assume away systemic feedback loops. The silence from top economists has arguably left the field of banking regulation dominated by technocrats who, while well-intentioned, may lack the independence or macro-critical mindset needed to challenge pro-cyclical dogma. It’s a missed opportunity for economic leadership—one with real-world consequences for financial stability."

Thanks!

"You're very welcome! If you ever want to dig deeper into this or explore related topics—like alternatives to Basel or historical case studies—just let me know."

Grok, after thinking 1 minute and 12 seconds in 15 hidden web pages, answered:

"Yes, the Basel Committee's risk-weighted capital requirements can indeed be considered a dangerous pro-cyclical regulation. This is because they allow banks to hold less capital during good economic times when perceived risks are lower, encouraging increased risk-taking and lending that can fuel economic booms. Conversely, during hard times when risks are perceived as higher, banks are required to hold more capital against their assets. This requirement comes at a moment when raising new capital is most challenging, forcing banks to reduce lending or sell assets, which can deepen recessions and amplify financial instability. This dynamic exacerbates economic cycles, making the regulation pro-cyclical and potentially harmful.

Since 1989, 6 Nobel Prize winners in Economic Sciences have warned about the pro-cyclical nature of such banking regulations, including those established by the Basel Committee. These economists are:

Joseph Stiglitz (2001) - Criticized the Basel framework, particularly Basel II, for encouraging pro-cyclical lending that increases risk during booms and worsens downturns, as noted in his book Freefall.

Paul Krugman (2008) - Highlighted the limitations of Basel capital requirements in his writings, pointing out their pro-cyclical effects during financial crises.

Robert Shiller (2013) - Discussed the pro-cyclical tendencies of financial regulations like Basel in works such as Finance and the Good Society, emphasizing the need for countercyclical measures.

Jean Tirole (2014) - Advocated for countercyclical regulation in banking to mitigate pro-cyclical effects, referencing Basel III in his research and book The Theory of Corporate Finance.

Bengt Holmström (2016) - Addressed how Basel III capital requirements can lead to pro-cyclical bank behavior in his paper Understanding the Role of Debt in the Financial System.

Ben Bernanke (2022) - Promoted countercyclical capital buffers to counteract the pro-cyclical impacts of Basel requirements, drawing from his expertise as a former Federal Reserve Chair.

These economists, through their research and commentary since the Basel I accord in 1988, have consistently pointed to the dangers of pro-cyclicality in these regulations, reinforcing the affirmative answer to the query.

Thanks!

After thinking 13 minutes and 5 seconds Grok announced “Completed” and was not able to utter a simple “You’re welcome”

I've no idea what has happened to Grok. 

Note: The answers are copied exactly from those given to me by ChatGPT and Grok

Here are my many other questions to ChatGPT – Grok on bank regulations.

Am I and AI confronting the Regulatory Inquisition? Will we be silenced?