#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.