#AI #OpenAI #ChatGPT: What’s more important: National banks being able to compete with foreign banks, or these helping their economies to compete with foreign nations?

I asked ChatGPT:

"Of course, both are important, but what do you think is more important:

National banks being able to compete with foreign banks, or national banks helping their national economies to compete with foreign economies?"

ChatGPT answered:

National banks helping their national economies to compete with foreign economies is more important.

While national banks competing with foreign banks is beneficial—ensuring they remain efficient, innovative, and globally relevant—banks ultimately serve as enablers of broader economic activity. Their primary role should be to support domestic businesses, infrastructure, and financial stability, which in turn strengthens the national economy’s competitiveness on the global stage.

If a country’s banks focus too much on competing internationally without prioritizing domestic economic health, they may allocate resources inefficiently or engage in riskier behaviors to chase global returns. On the other hand, a strong national economy, supported by effective banking policies, naturally enhances the ability of its firms (including banks) to compete globally.

I asked ChatGPT:

"I asked because, with respect to bank capital/equity requirements, that first objective is mentioned so much more by its regulators than the second one. Why do you think that happens?"

ChatGPT answered:

The emphasis by regulators on national banks competing with foreign banks—rather than on how banks help their economies compete—likely stems from a mix of historical precedent, institutional incentives, and geopolitical considerations:

1. Regulatory Competition & Global Coordination

Bank regulators, particularly in advanced economies, often operate within international frameworks like the Basel Accords. These frameworks are designed to harmonize capital standards across countries to prevent regulatory arbitrage (where banks move operations to jurisdictions with laxer rules). Regulators naturally focus on ensuring their banks remain competitive under these international rules, lest capital and business flow to foreign competitors.

2. Banking System Stability vs. Economic Competitiveness

Regulators' primary mandate is financial stability, not necessarily optimizing national economic competitiveness. They focus on ensuring banks have enough capital to withstand crises, prevent systemic risks, and maintain depositor confidence. While economic competitiveness is important, it’s seen as the domain of fiscal and industrial policy, not banking supervision.

3. Influence of Large Banks

Large multinational banks have strong lobbying power and often push the narrative that higher capital requirements reduce their ability to compete globally. This argument resonates with regulators, who don’t want to be seen as disadvantaging their own banking sector relative to foreign peers.

4. Shorter-Term Regulatory Focus

Banking regulators operate on cycles that focus on risk management, stress tests, and immediate financial stability rather than long-term economic competitiveness. Ensuring that national banks remain competitive with foreign banks is a more directly measurable goal than assessing how well the banking system contributes to national economic strength.

5. Perceived Trade-Offs

If regulators openly prioritized how banks contribute to national economic competitiveness, they might face pressure to lower capital requirements under the argument that it frees up more lending for domestic businesses. However, this could conflict with their financial stability mandate, making them reluctant to frame capital policy in such terms.

In short, regulators emphasize banks' global competitiveness because it aligns with their mandates and pressures, whereas supporting the national economy's competitiveness is a broader, more politically sensitive issue involving multiple policy domains beyond banking regulation.

I asked ChatGPT:

"Do you think this issue has been sufficiently debated by academicians and mainstream media?"

ChatGPT answered:

No, I don’t think this issue has been sufficiently debated—at least not in a way that directly addresses the trade-offs between bank capital regulations and their role in enhancing national economic competitiveness.

Why the Debate Has Been Incomplete

1. Academic Focus on Financial Stability

Most academic discussions around bank capital requirements focus on the trade-off between risk reduction and credit availability—not how regulations affect a nation's broader economic competitiveness.

There’s extensive research on Basel regulations, moral hazard, and financial crises, but relatively little connecting these directly to whether higher capital requirements help or hinder national firms competing internationally.

Even when economic competitiveness is discussed, it's often in relation to financial sector efficiency, not how banks serve the real economy.

2. Media’s Emphasis on Crises Over Structural Issues

The mainstream media mostly covers capital regulations in response to crises (e.g., 2008 financial crisis, post-COVID banking failures).

Coverage tends to be reactionary—focusing on whether banks are over- or under-regulated—rather than examining how capital rules affect a country’s long-term economic dynamism.

When competitiveness is discussed, it’s usually framed as "Are our banks too constrained?" rather than "Is our banking system effectively supporting national economic success?"

3. Dominance of the Global Banking Perspective

The debate is often shaped by institutions that have a global financial stability perspective (IMF, BIS, Basel Committee), which naturally prioritize preventing regulatory arbitrage over tailoring banking rules to national economic needs.

Policymakers sometimes accept global competitiveness as an implicit goal without questioning whether it should be a means to an end (a strong national economy) rather than an end in itself.

4. Lack of Clear Metrics for Economic Competitiveness

It's easier to measure a bank’s capital ratio than to measure how effectively the banking system is enhancing national competitiveness.

Without clear frameworks to assess this, the issue remains underexplored.

What Would a More Complete Debate Look Like?

To fill this gap, a deeper debate should:

✅ Examine whether higher capital requirements actually reduce lending to productive sectors or if they simply reduce excessive risk-taking.

✅ Compare countries where banking regulations are more pro-growth vs. stability-focused and analyze their economic performance.

✅ Consider how different business models (e.g., relationship banking vs. market-based finance) influence national economic competitiveness.

✅ Investigate whether alternative financial structures (e.g., state development banks, credit guarantee schemes) can compensate for stricter capital rules.

While some heterodox economists and policy thinkers have touched on these ideas, the mainstream discussion remains too focused on whether banks can compete, rather than whether they are helping their countries compete.

I said: "For many decades neither have I thought that, so, thank you very much for these answers."

ChatGPT said: You're very welcome! I'm glad we could explore this together, and I appreciate your thoughtful questions. These kinds of discussions—connecting financial regulation to real economic outcomes—deserve much more attention. If you ever want to dive deeper or challenge mainstream thinking on other topics, I’m always happy to discuss.

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

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

 

#AI ChatGPT – OpenAI: What if roulette paid out more than what odds merited on “safe” bets and less so with “risky” bets?

I asked OpenAI:

"What would happen to a casino if their roulette game paid out more than what odds merited on “safe” bets, like colors, and paid out less than what odds merited on “risky” bets, like numbers?"

OpenAI answered: 

"If a casino intentionally set up their roulette game to pay out more than the odds merited on "safe" bets, such as colors, and paid out less than the odds merited on "risky" bets, like numbers, it would be a highly unusual and unsustainable practice. Let's explore the potential consequences:

1. Initial Attraction: Initially, such a casino might attract more players who are enticed by the higher payouts on the "safe" bets. This could result in increased footfall and activity, as people perceive it as an opportunity to earn more.

2. Imbalanced Payout Structure: However, the imbalanced payout structure would create a significant advantage for the players on "safe" bets. Over time, the casino would start losing money on these bets. The casino's profits would heavily depend on players consistently making "risky" bets, where the odds are unfairly skewed against them.

3. Unsustainability: The casino's profitability would likely suffer in the long run due to the imbalanced payout structure. Skilled or knowledgeable players would realize the advantageous odds on "safe" bets and exploit them, while the allure of the lower odds on "risky" bets would eventually wane.

4. Reputational Damage: Operating a casino with a flawed payout system could result in significant reputational damage. Players would quickly recognize the unfairness and feel cheated. Word would spread, and the casino's credibility and trustworthiness would be severely compromised, leading to a loss of customer loyalty.

5. Regulatory and Legal Consequences: Casinos are subject to strict regulations and oversight. Intentionally manipulating payout odds could be considered fraudulent or illegal, depending on the jurisdiction. The casino could face legal consequences, fines, or even lose its license to operate.

6. Competition and Market Impact: In a competitive gambling industry, other casinos would likely capitalize on the opportunity to criticize and attract players away from the casino with the imbalanced payout system. They could emphasize fair odds and better player experiences, further eroding the imbalanced casino's market share.

In conclusion, intentionally setting up a roulette game with imbalanced payouts would likely lead to short-term gains followed by long-term losses, reputational damage, and potential legal consequences. Casinos typically operate based on the principle of providing games with fair odds and a built-in house edge to ensure profitability over time.

I asked OpenAI:

"Is that situation not somewhat similar to when regulators, with risk weighted bank capital requirements, allow banks to leverage their equity more with bets on what’s perceived as safe and thereby easier obtain higher payouts on equity, than with bets on what’s perceived as risky?"

OpenAI answered:

"Yes, you are correct that there is a similarity between risk-weighted bank capital requirements and the potential for banks to leverage their equity more with perceived "safe" bets. Let's delve into this further:

1. Risk-Weighted Capital Requirements: Risk-weighted bank capital requirements are designed to incentivize banks to allocate more capital for riskier assets. This means that banks must hold a higher amount of capital relative to the risk associated with a particular asset or exposure. The risk weights are typically determined by regulatory authorities based on the perceived riskiness of different types of assets.

2. Leverage and Payouts: When banks hold more capital against riskier assets, it effectively limits their ability to leverage their equity and increases the amount of capital they need to set aside. Consequently, banks have less leverage available to amplify potential gains or payouts on those riskier assets.

3. Perceived Safety and Higher Payouts: On the other hand, if regulators deem certain assets or exposures as less risky, they assign lower risk weights. This allows banks to hold less capital against those assets, enabling them to have higher leverage and potentially obtain higher payouts on their equity. This can be seen as an incentive for banks to allocate more resources towards assets perceived as safer.

4. Risk-Return Tradeoff: The risk-weighted capital requirements acknowledge the risk-return tradeoff inherent in banking activities. By allowing banks to leverage more on perceived safer bets, regulators aim to create a balance that encourages prudent risk management. Banks have the potential to generate higher returns on their equity from these safer bets, but with relatively lower risk.

It is important to note that risk-weighted capital requirements are part of a broader regulatory framework aimed at maintaining financial stability and safeguarding the banking system. Regulators continuously evaluate and adjust these requirements based on evolving market conditions and risk assessments.

While there are similarities to the casino example in terms of leveraging equity differently based on perceived risk, the motivations and implications in the banking sector are fundamentally different due to the importance of financial stability, prudential risk management, and systemic considerations.

I asked OpenAI:

With respect to obtaining profits without compromising the security of their entity, how do the motivations between casino owner and bank owners differ?

OpenAI answered:

"The motivations of casino owners and bank owners differ significantly due to the nature of their respective industries and the role they play within the economy. When it comes to obtaining profits without compromising the security of their entities, the motivations can be understood as follows:

1. Casino Owners: Casino owners primarily operate within the entertainment and gambling industry. Their motivation is to generate profits by offering various games and attractions to customers. However, casinos operate under the understanding that the odds are in their favor in the long run. They design their games to have a built-in house edge, ensuring that they are statistically likely to make money over time. The profitability of a casino depends on a consistent flow of customers who participate in games and, on average, lose more money than they win. Casino owners strive to strike a balance between providing an enjoyable experience to customers and maintaining profitability.

2. Bank Owners: Bank owners operate within the financial sector and provide various banking services such as accepting deposits, making loans, facilitating transactions, and offering investment products. Their primary motivation is to generate profits while managing risk. Banks make money through the interest charged on loans, fees for services, and returns on investments. However, their profitability is not solely dependent on customer losses but rather on effective risk management, prudent lending practices, and diversification of their operations. Banks have a fiduciary responsibility to protect customer deposits and maintain the stability of the financial system. Their motivations are driven by long-term sustainability, maintaining regulatory compliance, and building trust and confidence among their customers and stakeholders.

In summary, while both casino owners and bank owners seek profitability, their motivations and the ways they achieve profits differ significantly. Casino owners rely on the inherent odds in their favor, whereas banks aim to generate profits through a range of financial services while managing risks and maintaining the security and stability of their entities."

My comment: Artificial Intelligence here seems with certainty opine casino owners love profits much more than what bankers do. I guess AI could be helped by relying a bit more on Human Intelligence / Intuition.

Note: The answers are copied exactly from those given to me by OpenAI

PS. Not the first time I have dwelt on this issue.

Here my many other questions to ChatGPT – OpenAI on bank regulations

Please, let us not favor financing our houses more than the jobs our kids and grandchildren need

I refer to Avinash Persaud’s “Breaking the Link between Housing Cycles, Banking Crises, and Recession”

Avinash Persaud correctly states: “This story is not just about mortgages but also about the overall allocation of liquid and illiquid assets across the financial system” March 2016

Yes, indeed it is. I have for soon two decades criticized that the Basel Committee's concept of risk-weighted capital requirements for banks, dangerously distorts the allocation of bank credit.

Persaud writes: “Under Basel I, in the calculation of the amount of risk-weighted assets a bank had to fund with capital, securitized mortgages had a risk weight of 20 percent while nonsecuritized mortgages had a risk weight of 50 percent.” And Persaud translates that into “This allowed banks to earn fees and net interest margins on holding 2.5 times more credit”

A more precise description is that Basel I assigned a 50% weight to loans fully secured by mortgage on residential property that is rented or is (or is intended to be) occupied by the borrower, and Basel II reduced that to 35 percent. And Basel II also introduced that security or any financial operation that could achieve an AAA to AA- rating, was assigned a 20 percent weight.

And I translate that as: With Basel I and II’s standard risk weight of 8 percent, anything that has a risk weight of 100%, like loans to unrated SMEs and entrepreneurs, means banks can leverage its defined capital 12.5 times to 1 (100/8). 

But if it has access to a 20 percent risk weight, the bank can leverage its defined capital 62.5 times to 1 (100/1.6)

And banks, naturally, operate to maximize risk-adjusted returns on equity (and bonuses to the bankers).

And so there can be no doubt banks will allocate much to much credit, in much to easy conditions to mortgages and AAA rated securities (and to sovereigns with a zero percent risk weight) and much too little credit, in much to harsh relative terms, to what is risk weighted more than that like, SMEs and entrepreneurs.

And so, while I fully share Persaud’s argument about preferring insurance companies to banks to finance mortgages, so as to minimize maturities mismatches, my concerns go much further than his.

I do not want to favor, in any way shape or form, the “safe” financing of mortgages, whether by banks or insurance companies, over the “risky” financing of the job creation our children and grandchildren need.

PS. What would houses be worth if there was no financing available for buying houses? I ask because mortgages might now be financing more the credit available for buying houses than the real intrinsic value of houses. Oops!

PS. A memo on the many mistakes of current risk weighted capital requirements for banks

PS. ChatGPT Grok: "If with lower bank capital/equity requirements you make banks hold more residential mortgages than loans to small businesses and entrepreneurs, will not house prices, in the long term, become higher than what the real economy can justify?"

World Bank and IMF, is the stability of banks really a good growth (or stability) strategy?

The most important “New Growth Strategy” that has been put in effect by global authorities during the last decades, is the one based on the notion that as long as our banks are stable, the economy will grow and everything will be fine and dandy.

And, in order to foster that stability of the banks, the Basel Committee for Banking Supervision designed a system of ex ante perceived credit-risks weighted capital (equity) requirements, which translates into: more-risk-more-equity, less-risk-less-equity. 

And that allows banks to be able to earn much much higher risk-adjusted returns on equity when lending to “the infallible” than when lending to “the risky”.

And, of course, the result was just as could have been expected… huge exposures to the infallibles, like to AAA rated securities (subprime mortgages USA), sovereigns (like Greece) and real estate (Spain)… and no exposures at all to the risky, like to medium and small businesses, entrepreneurs and start ups.

So how has that strategy worked? I would dare say “quite lousily”… but I might be wrong… because I see most of you feel like it is ok for those responsible for Basel I and Basel II, to now have a go at Basel III, that is if they are not to take up even higher responsibilities, like that of chairing the ECB.

I have always thought that risk taking was the oxygen of development, and that secular stagnation, deflation, mediocre economy, unemployment, underemployment, managed depression and all similar obnoxious creatures, were all direct descendants of risk aversion. But, then again I might be wrong, especially considering that the world’s premier development bank, has not objected one iota to that artificial regulatory risk aversion 

Looking back at history I have also always thought that what really posed dangers to the stability of banks, was what is perceived ex ante as absolutely safe. That because there is were the real dangerously large exposures could be found, never among the risky, But, then again I might be wrong, especially considering that the world’s premier financial stability agent, has not objected one iota to that structure of incentives for the allocation of the portfolios of banks.

It will be very interested to hear what renowned experts like Andreu Mas-Collel, Dani Rodrik, Philippe Aghion, Arvind Subramanian, Ivan Rossignol will have to say about that when, on October 14, they discuss in Washington: “New Growth Strategies: Delivering on Their Promise?” Sorry I can't be there (well not that sorry, since I will be in Paris :-))

PS. And, while you’re at it, if you can spare a second, give a thought to whether the risk-weighted bank capital requirements are helpful in order to decrease inequality or financial exclusion… or if perhaps they may serve as drivers of that.

PS. And, while you’re at it, if you can spare a second, give a thought to whether injecting some purpose into bank capital requirements could do some good, like instead of using credit ratings, using perhaps potential of job creation ratings, sustainability of planet earth ratings, and good governance and ethics ratings of governments.

Does really a bank´s "living will" make much sense?

Living wills: “Detailed plans that would enable banks to stipulate in advance how they would raise funds in a crisis and how their operations could be dismantled after a collapse”.

The whole concept of living wills for banks’ designed by the bankers themselves, for how to handle a collapse, seems to me a bit of a show by regulators to show they are doing something and to have something to put the blame on tomorrow…. “They gave us a bad living will” 

I mean if I was a regulator, and wanted to go down that route, I would at least have a third party to look into what could be done in the case a bank passed away, and now and again confront the managers of the bank with those plans, in order to hear their opinions.

For instance there is a world of difference between a living will where the dead are going to be the own executors of the will, and one in which the dead will be dead and others will take care of the embalming.

And talking about this should not the Fed or the FDIC first state what contingent plan they really want… one where the bank is placed on artificial survival mode, and for how long, or one where it is sold in one piece, by pieces or even cremated?

To me it would seem that the Fed and FDIC need to give much clearer instructions about what they want those bankers who are currently working under the premise the bank will live on forever to do… as I can very much understand bankers being currently utterly confused.

PS. And, to top it up, regulators should worry more about how banks live than about how they die. Thanks in much to the distortions created by the regulators with their risk-based capital requirements, the banks are not allocating credit efficiently and their legacy is therefore condemned to be poor. And… excuse me, that´s a far more serious problem.

No! Bank regulators, much more than they deregulated, just regulated amazingly bad.

Here is an interview by Econ Focus of Richmond Fed with Mark Gertler, which repeats the falsehood of bank regulators believing too much in the market.

Gertler: The biggest mistakes probably involved too much deregulation.

Econ Focus: What do you think is the best explanation for the policies that were pursued? 

Gertler: At the time, I think it was partly unbridled belief in the market — that financial markets are competitive markets, and they ought to function well, not taking into account that any individual is just concerned about his or her welfare, not about the market as a whole or the exposure of the market as v a whole. 

I am sorry. That is simply not true. 

Anyone with any reasonable belief in the market being able to allocate credit adequately in the economy… would never ever have interfered by means of setting the capital requirements for banks based on risks which were already cleared for by banks. 

That resulted in banks earning much higher risk-adjusted returns on equity when financing what is ex ante perceived as “safe”, than when financing what is ex ante perceived as “risky”, something which of course distorts all common sense out of bank credit allocation.

For instance, Basel II had it that if a European bank made a loan to a medium and small business, an entrepreneur or a start up, then it needed to hold 8 percent in capital, a leverage of 12.5 to 1, but, if it purchased AAA rated securities, then it needed to hold only 1.6 percent in capital, a leverage of 62.5 to 1. And that of course had Europe buying the securitized subprime mortgages like if there was no tomorrow… and so did the investment banks when authorized by the SEC to follow the Basel rules.

In other words... bank regulators did not believe in the markets... they believed in themselves being the Masters of the Universe, capable of managing risks for the whole banking world.

In other words... bank regulators instead of concerning themselves with any "unexpected losses", which is what they should do, decided to also manage the expected losses.

In other words... bank regulators were just amazingly bad. In terms of Bill Easterly... God save us from the tyranny of experts.

“The World Development Report 2014 - Risk and Opportunity”, seems to completely ignore what is dumb and dangerous with Basel Committee´s risk adverse bank regulations

In its introduction, Jim Yong Kim, the president of the World Bank, expresses his “hope that the WDR-2014 will lead to risk management policies that allow us to minimize the danger of future crisis and to seize every opportunity for development.”

Sir, though WDR 2014 will surely contribute importantly in many ways and in many areas, unfortunately, with respect to the "Financial Sector", it does little, or even nothing, to help to achieve those goals. This is so because it seems to completely ignore the absolutely mistaken principles of current bank regulations being disseminated around the world. With their dumb and dangerous risk-aversion, these regulations attempt directly against development and stability. More than manage risks, those regulations have generated enormous risks.

More than 10 years ago, April 2003, when commenting on The World Bank’s Strategic Framework 2004-06, in a written statement which I delivered as an Executive Director of the World Bank, I opined the following: 

"The Basel Committee dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In its drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. The World Bank seems to be the only suitable existing organization to assume such a role."

Unfortunately, the World Bank, or any other institution, did not assume such a role, and as a consequence we have landed ourselves with the most dumb and dangerous bank regulations possible.

Before explaining it, let me, just as a reference for why I deserve being listened to, point to a similar statement at the Board on October 19, 2004, and in which I so correctly and timely warned: 

“We believe that much of the world’s financial markets are currently being dangerously overstretched though an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

The pillar of the Basel Committee’s bank regulations, is capital requirements for banks based on ex ante perceived risks of borrowers. These allow banks to hold much much less capital against assets perceived as “absolutely safe”, “The Infallible”, than against assets perceived as belonging to “The Risky”. A more capable regulator, would be much more concerned about what bankers do with the risks they perceive, and with what happens when those ex ante perceptions, turn out, ex post, to have been wrong.

And those risk-weighted capital requirements result directly in that banks are able to earn much much higher risk adjusted returns on equity, when lending to some sovereigns, housing or the AAArisktocracy, than when lending to the medium and small businesses, entrepreneurs and start-ups. Something like rewarding children with chocolate cake when they eat ice cream, and punishing them with spinach when they eat broccoli... and declaring being surprised when kids turn out obese. And it is all like drastically changing the payouts on roulette bets, and believing the game of roulette will remain the same. 

And since the assessments of safeness and riskiness were to be done by very few human fallible credit rating agencies, on January 2003, in a letter published in the Financial Times, I also warned:

"Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds. Friends, as it is, the world is tough enough." 

And so those regulations doomed of course the banks to, sooner or later, create excessive and dangerous bank exposures to something that would have erroneously been considered as “absolutely safe”; like AAA rated securities backed with lousily awarded mortgages to the subprime sector, banks in Ireland, real estate in Spain, and sovereigns, like Greece. And doomed the banks to have especially little capital when the biggest disasters struck. It even did the eurozone in. Just a little empirical research on what causes bank crises, would have concluded that... never ever, those ex ante perceived as risky.

And, of course, that also doomed those who though “risky”, are the true dynamos of the real economy, and the best possible creators of the next generation of sturdy jobs, and who are those most in need of bank credit, to have their competitive access to bank credit severely curtailed. And that has effectively placed the economy in a shutdown mode… and whatever movement we might detect in it, might have to do with the sad fact that it is heading down down, on a very slippery slope.

And this truly odious regulatory discrimination is only helping to increase the gap between the past, the developed, the haves, and the future, the developing, the have nots. In other words it excludes more than it includes. WDR-2014 writes: “All too often risk management strategies prove ineffective (or introduce other risks) because they are not coordinated among all relevant policy stake holders”. Indeed! And I ask… who consulted bank regulations with “The Risky” borrowers?

But not one word about all that in WDR-2014!

The WDR-2014 does state though: “Stability. The Achilles’ heel of the financial system is its propensity for crisis”. And that is wrong! Its Achilles’ heel is the propensity to try to delay the crises. May 2003, at the World Bank in a workshop on bank regulations, I told those present: 

“A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.” 

And the WDR-2014 does propose creating a "National Risk Board", "an integrated, permanent risk management agency that deals with multiple risks." That might have some advantages, but it also reminds me of why, in November 1999, I had to write in an Op Ed:

"The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its total collapse"

Jim Yong Kim also writes: “This year’s WDR cautions that the greatest risk may be taking no risk at all”. And he is absolutely correct. But, unfortunately, the great institution he presides, the world’s premier development bank, seems not to fully understand that risk-taking is in fact the oxygen of development.

And, therefore, the World Bank has done nothing to stop the members of the Basel Committee, and of the Financial Stability Board, those who with so much hubris believe themselves capable of being the financial risk-managers of the world, from applying their so truly risky risk-adverse bank regulations.

Let me end by reminding you that these regulators, those who after the Basel II flop are still allowed to work on Basel III (neither Hollywood nor Bollywood would be so dumb), were the real enablers of our current bank crisis. If in doubt, just ask yourselves whether the market, in the absence of any bank regulations, would have allowed banks to leverage 50 to 1?

God make us daring! We need bankers capable of reasoned audacity! World Bank, step up to your duties!

Per Kurowski

PS. IMF is also completely disoriented by current bank regulations. They have for instance no idea of what would be the real market interest rates on public debt, for instance in the US, if banks needed to hold the same amount of capital against it, as they are required to hold against a loan to a citizen.

PS. I hear you. "Per, how can this be?" Well, Patrick Moynihan said “there are mistakes only PhDs can make; and George Orwell that “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” But I personally think, this is the typical thing to happen, when the wish of not criticizing colleagues in ones networks, crosses the path of those not wanting to admit they do not understand one thing of the mumbo jumbo that is being said.

PS. Here is a current summary of why I know the risk weighted capital requirements for banks are utter and dangerous nonsense.

You, the bank regulating scientists, would you please explain something to a layman?

Below what I saw while walking around in the Washington Zoo with my constituency (my grandchild) and which inspired me to ask our bank regulation scientists friends a question.

Smithsonian scientists learn a lot by observing animals. 

Now its your turn to WATCH AND LEARN

So now it is with you bank regulator. You are the scientist. Scientist learns a lot, by observing banks and bankers. So please explain.

Observe what type of bank exposures have caused all major bank crises:

1. One or many of those ex ante considered risky, and that ex-post turned out to be risky?

2. One or many of those ex ante considered risky, and that ex-post turned out to be safe?

3. One or many of those ex ante considered absolutely safe risky, and that ex-post turned out to be safe?

4. One or many of those ex ante considered absolutely safe risky and that ex-post turned out to be very risky?

And now, you bank scientists answer us non bank scientists. 

For what type of exposures would the empirical evidence suggest the capital requirements for banks should be higher?

Aha! 

And so then explain to us, in easy terms, why you, the Basel Committee for Banking Supervision, the Supreme Global Bank Supervisor, set rules which allowed the banks to have much much less capital for what was ex ante perceived as "absolutely safe", than for what ex ante is perceived as risky?

Please?

PS. My own humble opinion is that our bank regulation scientist friends have got themselves trapped in quite a bit of confusion. They keep on analyzing the possible failure of bank borrowers and not, as they should, the reasons for why banks fail, as entities or in allocating credit to the real economy. And that is of course not the same thing, or, as they say in French, c’est pas la même chose… For instance instead of looking at the ex ante credit ratings of bank borrowers they should look at what bankers do when they see those same credit ratings.

In other words, the regulators instead of analyzing so much the ex ante creditworthiness of bank borrowers, to determine their risk weights, should have analyzed, at least a little, the ex-post explanations for why banks fail and for why bank crises occur. Holy moly!

PS. As I see it: The world (with its banks) is much better off thinking that the risky are less risky than we think them to be, than that the "safe" are as safe as we think.

Young! Fight for your right that the society, through its banks, takes the risks you need for your future

Today I refer to the global tragedy of rising youth unemployment. I contend that to a large extent it is caused by the appalling banking regulations of the Basel Committee.

These regulations require banks to hold much more capital (equity) for assets considered "risky" than for those that are perceived as "absolutely safe". And that, no matter what you might think, makes no sense.

As a result the banks obtain much higher risk-adjusted returns on their assets, when lending to “the infallible” than when lending to "the risky”. Something which simply means favoring those already favored by the market, and discriminating those already discriminated by the market. And the consequences are dire.

That alone ensures that when one of those ex ante "infallible" is, sooner or later, ex post, found out to be risky, the bank will stand there naked, with little or no equity to cover up for huge exposures.

And worse, it shatters the chances of banks efficiently allocating credit resources in the real economy... which as you understand means low job creation.

In Washington, in October, there will be a "Youth Summit". In a world where there are so many old people much more concerned about their own welfare, than with the prospects of the young, the summit may not receive sufficient attention .

The summit invites people between 18 and 35 years to submit proposals on development cases, highlighting the challenges faced in real life development organizations. One of these is titled "A better financial product for micro entrepreneurs, young people and small businesses."

And since as "old" I cannot compete, I here try to squeeze by a proposal:

Bank Regulators: Eliminate capital requirements based on perceived risk. With these you only encourage banks to lend more and in better terms to the "absolutely safe". Accept the fact that risk-taking is the oxygen of all development.

Apart from it all your risk aversion is useless. All the major problems with banks, past, current and future, will always result from what you regulators, and the bankers, considered as “absolutely safe”; like sovereign, real estate and AAA credit ratings holders. We have never ever experienced a banking crisis that has resulted from excessive loan exposures to “the risky”, micro-entrepreneurs and small businesses.

And, regulators, if you absolutely must distort the market, in order to justify your salaries, or feed your egos, then at least let the banks hold less capital only in accordance to ratings which indicates the potential of generating employment for the youth, or the sustainability of the environment.

At least banking would in that case be fulfilling a social purpose much more important than being the financier of the AAAristocracy.

“The risky" have the right to bank credit on competitive terms, and that without being relegated to use specialized microfinance entities.

The banks cannot afford not to take the risk on “the risky". On that depends, the creation of the future jobs of our youth, the "infallible" of tomorrow, and even the existence of truly safe banks.

Note: The summit is organized by the Junior Professional Associates at the World Bank (JPA), the United Nations Foundation, Athgo a NGO in Los Angeles, and YEN , a network created by the World Bank , the United Nations and the International Organization Labour Office (ILO ).

Translated from El Universal, Caracas, August 29, 2013

PS. In fact there is no way that when the young finally understand the hurt that is being done to them, that they will not revolt… and then perhaps suggest to us older the reinstatement of an “Ättestupa”

More:

http://subprimeregulations.blogspot.com/2013/06/g8-for-unemployed-young-ones-sake.html
http://subprimeregulations.blogspot.com/2013/02/how-many-young-in-europe-are-unemployed.html
http://subprimeregulations.blogspot.com/2012/10/the-world-banks-world-development.html
http://perkurowski.blogspot.com/2012/04/we-need-worthy-and-decent-unemployments.html
http://perkurowski.blogspot.com/2011/04/young-unemployed-forever.html
http://perkurowski.blogspot.com/2006/07/on-faith-based-organizations-as.html
http://subprimeregulations.blogspot.com/2014/11/the-basel-committee-financial-stability.html