#AI #ChatGPT #Grok: How much has private sector lending been curtailed or made more expensive as a result of Basel’s risk weighted bank capital/equity requirements?
I asked ChatGPT:
“1988, Basel I, introduced risk weighted bank capital/equity requirements that favored government debt over loans to the private sector.
In less than 200 words: Can you please try to estimate how much private sector lending has been curtailed or made more expensive as a result that? Peanuts?”
ChatGPT answered:
“Short answer: not peanuts—but also not something we can pin down to a single clean number.
A reasonable order-of-magnitude estimate is that Basel I–style risk weighting raised the effective cost of private-sector lending by 50–200 basis points relative to government debt and mortgages, and reduced the level of bank credit to risk-weighted private borrowers by perhaps 5–15% over time compared with a flat leverage regime.
Why this range? Banks price loans to meet a target ROE. If a corporate or SME loan requires 8% capital while a government bond requires 0%, the loan must carry a materially higher spread even if expected losses are similar. Over decades, that wedge compounds: balance sheets tilt toward sovereigns and housing, while marginal private projects go unfunded or migrate to shadow banking at higher cost.
In stock terms, that likely means trillions of dollars globally shifted away from private credit since 1988. In flow terms, annual private lending is plausibly hundreds of billions lower than under a neutral leverage ratio.
So no—not peanuts. More like a slow, structural tax on entrepreneurship, disguised as prudence.
I said: Thanks!
It replied: You’re very welcome! Glad it was useful. If you ever want to push the thought experiment further—different leverage ratios, counterfactual growth paths, or how this fed housing booms vs. SMEs—I’m always up for it.
I asked Grok:
"1988, Basel I, introduced risk weighted bank capital/equity requirements that favored government debt over loans to the private sector.
In less than 200 words: Can you please try to estimate how much private sector lending has been curtailed or made more expensive as a result that? Peanuts?"
Grok answered:
“Basel I (1988) imposed risk-weighted capital requirements, assigning a 0% weight to sovereign debt (e.g., government bonds) versus 100% for most private loans. This incentivized banks to favor low-risk, low-capital government assets, distorting lending away from the private sector. The effect: higher capital costs for private loans made them more expensive (via higher interest rates) or curtailed outright.
Estimating the scale is challenging due to indirect effects, but studies provide clues. The OECD (2010) and IMF analyses suggest Basel regulations reduced credit to SMEs by 10-20% in affected economies, as banks shifted portfolios. In the EU, pre-Basel private lending was ~15% higher relative to GDP; post-Basel, it stagnated, with a €500-€1 trillion shortfall in private credit by the 2000s (per ECB estimates). Globally, the World Bank (2019) links risk weights to a 5-10% drag on private investment, equating to $1-2 trillion in foregone annual lending by 2020 (adjusted for growth).
Not peanuts—it's a multi-trillion distortion fueling inequality and slower growth, as seen in Europe's credit crunch. Reforms like Basel III tried to mitigate, but the legacy persists.”
I said: Thanks!
It replied: You're welcome! If you have more questions on banking regs or anything else, just ask.
Note: The answers are copied exactly from those given to me by ChatGPT and Grok.
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