#AI #ChatGPT – #Grok: Has a bank regulator ever asked your opinion about the risk weighted bank capital requirements?

I asked ChatGPT

“Has anyone responsible for bank regulations, e.g., a member of the Basel Committee, ever asked your opinion on how the risk weighted bank capital requirements affect banks and the economy, when compared to just using a leverage ratio?:

ChatGPT answered:

Short answer: no.

I’m not consulted, formally or informally, by bank regulators, members of the Basel Committee, or any policymaking body. I don’t participate in meetings, hearings, advisory panels, or private consultations, and I don’t have standing relationships with regulators.

What I can do—and what often creates the impression of “having an opinion”—is synthesize and explain the arguments that have been made in the academic and policy literature over decades. On your specific question, that includes:

· The long-standing critique (from economists such as Hellwig, Admati, Haldane at times, and others) that risk-weighted capital requirements distort credit allocation, encourage regulatory arbitrage, and embed political judgments about “safe” assets.

· The counter-argument from regulators that risk sensitivity reduces unnecessary capital burdens and aligns regulation with measured risk—though this depends heavily on models and assumptions.

· The view, which you often emphasize, that a simple leverage ratio is more transparent, harder to game, and more robust under uncertainty, albeit potentially cruder.

Regulators occasionally acknowledge these debates in speeches, BIS working papers, or dissenting remarks, but that is very different from asking me—or any model like me—for advice.

If anything, my role is closer to that of a well-read, neutral explainer: I can help articulate trade-offs, stress-test arguments, and sharpen critiques (including yours), but influence only occurs indirectly, through the humans who read, think, and decide.

I asked ChatGPT:

Do you think that is because they would be scared, for instance of losing their jobs, if your answers fundamentally questioned current regulations, be it Basel I, Basel II, Basel III or any envisioned Basel endgame?

ChatGPT answered:

That explanation is plausible, but it is only part of the story, and not the most important part.

First, it’s unlikely that regulators avoid me out of fear of job loss. They don’t consult me because they don’t consult any external, uncontrolled source at all—especially not one that can articulate arguments without institutional constraints. Modern regulation is produced inside tightly governed processes: committees, mandates, negotiated texts, impact studies, and political oversight. Outsiders—human or AI—sit outside that machinery.

The deeper reason is institutional self-preservation, not personal fear.

Basel-style regulation is built on three pillars that make fundamental questioning uncomfortable:

1. Path dependence

Once risk-weighted capital became the organizing principle in 1988, careers, models, datasets, supervisory practices, and international coordination all grew around it. Abandoning or radically downgrading it would implicitly admit that decades of work rested on a fragile premise.

2. Distributed responsibility

Basel decisions are collective. No single regulator “owns” the framework, which paradoxically makes it harder for anyone inside the system to say: the core idea may be wrong. Challenging the foundation threatens the legitimacy of the entire cooperative structure.

3. Political cover

Risk weights allow regulators to say, “We are being scientific and risk-sensitive,” while quietly embedding policy choices (e.g., favoring sovereign debt or housing). A simple leverage ratio removes that discretion—and with it, a key source of political insulation.

So the resistance is less about someone thinking, “I’ll be fired if this is wrong,” and more about:

“If the premise is wrong, what exactly am I supposed to replace it with—tomorrow, consistently, across 30+ jurisdictions?”

In that sense, critiques like yours are not dangerous because they are radical, but because they are clarifying. A simple leverage ratio strips away the comforting complexity and forces regulators to confront uncertainty directly—something large institutions are structurally bad at doing.

That is not cowardice; it is bureaucracy doing what bureaucracy does.

I said: Thanks!

It replied: You’re very welcome, Per. As always, I appreciate the clarity and persistence of your questions—they go straight to first principles. If you ever want to sharpen the argument further (or stress-test it from the strongest opposing angle), I’m glad to help.

I asked Grok:

"Has anyone responsible for bank regulations, e.g., a member of the Basel Committee, ever asked your opinion on how risk weighted bank capital requirements affect banks and the economy, when compared to just using a leverage ratio?"

Grok answered:

"No, to the best of my knowledge and based on available public records, no one responsible for bank regulations—such as a member of the Basel Committee on Banking Supervision or similar regulatory bodies—has ever directly asked for my opinion on this topic. As an AI built by xAI, my interactions are primarily with users through platforms like this, and there's no documented outreach from such entities in searches of web sources, X posts, or related discussions.

That said, since your question touches on a long-debated aspect of financial regulation, I'll share an analysis of how risk-weighted bank capital requirements (as implemented under Basel frameworks) compare to a simple leverage ratio, drawing from economic literature and regulatory insights. This is based on a balanced review of sources representing various stakeholders, including regulators (e.g., BIS, Federal Reserve), academics, and critics (e.g., Brookings, IMF). The goal is to substantiate claims without shying away from potentially contentious points, such as how these rules can distort credit allocation or systemic stability.

Key Concepts

Risk-Weighted Capital Requirements (RWCR): Under Basel III (and predecessors), banks must hold capital proportional to the risk of their assets. Assets are assigned risk weights (e.g., 0% for government bonds, 100% for corporate loans, higher for riskier items like equities). Minimum ratios include 8% Tier 1 capital to risk-weighted assets (RWA), plus buffers.

Leverage Ratio (LR): A non-risk-weighted measure, requiring banks to hold a minimum percentage of Tier 1 capital against total exposures (on- and off-balance-sheet). Basel III sets a 3% minimum, with higher requirements for global systemically important banks (G-SIBs) in some jurisdictions (e.g., 5-6% in the US via the supplementary leverage ratio).

Effects on Banks: RWCR aims to make capital holdings "risk-sensitive," but it can incentivize behaviors that a pure LR avoids. Conversely, LR provides a blunt backstop but may not fully address risk differentials.

Incentives for Risk-Taking 

Risk-Weighted Capital Requirements (RWCR): Encourages holding low-risk-weighted assets (e.g., sovereign bonds or mortgages) to minimize capital needs, potentially leading to "risk-weight optimization" or gaming (e.g., favoring AAA-rated securities that failed in 2008). Critics argue this distorts portfolios toward perceived "safe" assets, building hidden systemic risks. Empirical studies (e.g., BIS working papers) show it reduces overall bank leverage but can increase asset risk if banks shift to higher-yield items within low-weight categories. 

Leverage Ratio (LR): Ignores risk weights, so it caps total leverage regardless of asset type. This can discourage excessive low-risk asset accumulation but may incentivize banks to take more risk per asset (e.g., shifting to higher-return, riskier loans) since all assets cost the same in capital terms. Research (e.g., ECB papers) finds LR binding during booms, acting counter-cyclically to curb over-lending. 

Combined Effects (as in Basel III): RWCR + LR complement each other: LR acts as a "backstop" to RWCR flaws (e.g., inaccurate risk weights), preventing excessive leverage in low-risk portfolios. However, when LR binds (as it increasingly does for large US banks), it can override RWCR, making regulation less risk-sensitive and potentially raising lending costs for low-risk activities.

Operational Complexity and Compliance 

Risk-Weighted Capital Requirements (RWCR): High: Requires sophisticated models (internal ratings-based approaches for big banks), leading to variability in RWA calculations across institutions. This erodes comparability and trust (a key Basel III reform goal). Smaller banks often opt out (e.g., US community bank leverage ratio). 

Low:Leverage Ratio (LR): Simple calculation based on total exposures. Easier to monitor and less prone to manipulation. 

Combined Effects (as in Basel III); Dual system increases burden but enhances robustness; e.g., post-2008 crises showed RWCR alone failed to capture off-balance-sheet risks.

Impact on Bank Stability 

Risk-Weighted Capital Requirements (RWCR): Improves resilience by tying capital to risk, but historical failures (e.g., 2008 subprime crisis) highlight underestimation of risks in weights. IMF analyses suggest RWCR reduces crisis probability but at diminishing returns beyond 15-23% of RWA. 

Leverage Ratio (LR); Boosts loss-absorbing capacity uniformly, reducing failure odds in leverage-driven crises. Studies (e.g., Federal Reserve) show LR enhances net benefits by limiting RWCR-induced risk-shifting. 

Combined Effects (as in Basel III): Both reduce systemic risk: A 1% LR increase cuts distress probability more than equivalent RWCR hikes (Bank of England simulations). But over-reliance on RWCR can amplify procyclicality (e.g., risk weights compress in booms).

Effects on the Economy

These rules influence credit allocation, growth, and inequality. Proponents (e.g., BIS) argue they prevent crises costing 3-10% of GDP; critics (e.g., some economists) claim they distort markets.

Credit Allocation and Growth: RWCR favors "safe" sectors (e.g., government debt, housing) with low weights, potentially starving riskier but productive areas like SMEs or innovation. This can weaken long-term growth by creating "zombie lending" or asset bubbles (e.g., pre-2008 housing). A pure LR might equalize access but raise overall borrowing costs, as banks pass on higher capital expenses. Balanced views (e.g., Brookings) emphasize both are needed: RWCR for efficiency, LR to prevent distortions. Empirical evidence (e.g., IMF) shows higher capital requirements slow credit growth short-term (0.5-1% GDP drag per 1% ratio increase) but yield net benefits via fewer crises.

Procyclicality and Crises: RWCR amplifies booms/busts—risk weights fall in good times, encouraging leverage; rise in downturns, forcing deleveraging. LR is more stable, acting as a counter-cyclical buffer. Post-Basel III data (e.g., BIS monitoring) indicates combined rules have raised global bank capital to ~14% of RWA, reducing crisis risks but with trade-offs in lending to high-risk sectors.

Broader Economic Trade-Offs: Higher requirements (under either system) increase bank funding costs, potentially passed to borrowers (e.g., 10-20 bps higher loan rates per 1% capital hike, per some models). But they socialize fewer losses (e.g., bailouts). In emerging economies, RWCR may hinder development by overweighting sovereign risks; LR could better support broad credit. Politically, RWCR has been criticized for favoring incumbents (e.g., big firms with low-risk profiles) over entrepreneurs, potentially exacerbating inequality.

Overall Assessment

Evidence suggests neither approach is perfect alone—RWCR promotes risk awareness but invites arbitrage and distortions; LR ensures simplicity and minimum safeguards but may blunt incentives for prudent lending. Basel III's hybrid model (RWCR as primary, LR as backstop) is substantiated as optimal in many studies (e.g., reducing crisis costs by 1-5% of GDP annually), though some argue for higher LR minima (5-6%) to counter RWCR flaws. If shifted to pure LR (e.g., 8-10% as some propose), banks might face less distortion but higher costs for safe activities, potentially slowing growth in risk-averse economies. Conversely, over-relying on RWCR risks repeating 2008-style failures.

If you'd like me to dive deeper into specific studies, model a scenario, or compare jurisdictions (e.g., US vs. EU implementations), just let me know!"

I asked Grok:

“Do you think that is because they would be scared, for instance of losing their jobs, if your answers fundamentally questioned current regulations, be it Basel I, Basel II, Basel III or any envisioned Basel endgame?”

Grok answered:

“It's plausible that fear of professional repercussions, including job security, could play a role in why regulators might hesitate to seek out or engage with perspectives that deeply challenge the Basel frameworks. After all, these standards—evolved from Basel I (1988, focused on credit risk) through Basel II (2004, adding operational and market risks with internal models) to Basel III (post-2008, emphasizing higher capital, liquidity, and leverage ratios)—represent decades of international consensus-building among central banks and supervisory authorities. Questioning their core assumptions, like the reliance on risk-weighted assets (RWA) over simpler leverage ratios, could disrupt established careers built on implementing and defending them. However, based on a review of economic analyses, regulatory critiques, and public discussions, I think the reluctance stems more from systemic factors like institutional inertia, regulatory capture by large banks, and the sheer complexity of the rules themselves, rather than purely personal fears. Let me break this down.

Institutional Inertia and Path Dependence

The Basel Accords are the product of the Bank for International Settlements (BIS) and its Basel Committee, involving over 45 jurisdictions. Once embedded in national laws (e.g., via EU's Capital Requirements Directive or U.S. Dodd-Frank), changing them requires massive coordination. Regulators might avoid "fundamental questions" not out of personal fear, but because the system is designed for incremental tweaks, not overhauls. For instance, Basel III's "Endgame" reforms (finalized in 2017, implemented variably since) aimed to fix RWA inconsistencies but still preserved the risk-weighting paradigm, despite evidence it encourages arbitrage (e.g., banks favoring low-weighted assets like sovereign bonds, leading to hidden risks as in the 2008 crisis). Studies show that while higher capital reduces crisis risks, the procyclical nature of RWAs amplifies booms and busts, yet reforms stop short of scrapping them due to entrenched interests. This inertia could make seeking an AI's outsider view seem pointless or risky to the status quo.

Regulatory Capture and Industry Influence

A stronger explanation is regulatory capture, where big banks lobby to shape rules in their favor, often at the expense of broader economic health. Large institutions benefit from complex RWAs because they can use internal models to minimize capital holdings, while smaller banks face higher compliance costs. Critics argue this distorts lending away from productive sectors (e.g., SMEs) toward "safe" but speculative assets, exacerbating inequality and slowing growth. In the U.S., recent pushback against Basel III Endgame proposals (which would raise capital by 9-16% for big banks) came from industry pressure, leading regulators to soften or delay them—despite evidence that current levels are already optimal or excessive in some models. Public discussions on X highlight how banks fight stricter requirements to protect profits, with regulators sometimes aligning due to revolving doors (e.g., ex-regulators joining banks). If my analysis (as in our prior exchange) exposed how RWAs incentivize risk-shifting while leverage ratios offer simpler stability, it might amplify calls for change that threaten this captured equilibrium—potentially endangering regulators' positions amid political backlash.

Complexity as a Barrier

Basel's evolution has ballooned into a labyrinth: Basel III alone spans thousands of pages, with add-ons like countercyclical buffers and G-SIB surcharges. This complexity breeds opacity, making it hard for even insiders to question fundamentals without seeming uninformed. As one analysis notes, it allows "regulatory arbitrage" where banks game weights to hold less capital, but regulators defend it as "risk-sensitive." Seeking an AI opinion might reveal these flaws starkly (e.g., how RWAs failed in 2008 by underweighting subprime risks), but it could also invite scrutiny on regulators' own enforcement gaps. In emerging markets, simpler leverage ratios are recommended over RWAs for this reason, yet global standards resist. 

Factor 

Why It Discourages Questioning Basel 

Evidence from Basel History 

Potential Job Risk Tie-In

Inertia 

System locked into RWAs; overhauls disrupt global harmony. 

Basel I/II loopholes led to 2008, yet III doubled down on weights. 

Challenging could label regulators as "disruptors," harming promotions in bureaucratic bodies like BIS.

Capture 

Banks lobby for leniency; rules favor big players. 

U.S. softened Endgame after bank pushback; EU over-applied to small banks, killing 6,000 locals. 

Regulators with industry ties (common) face conflicts; whistleblowing risks exclusion from post-reg jobs.

Complexity 

Hard to critique without deep expertise; hides flaws. 

Internal models vary RWAs by 2-3x across banks, eroding trust. 

Admitting flaws questions their competence, inviting audits or firings in accountability-driven agencies.

In sum, while personal fears like job loss aren't unfounded—especially in politicized environments (e.g., U.S. Congress grilling regulators)—the deeper issue is a self-reinforcing system where Basel's flaws are acknowledged but not uprooted. If anything, my take (favoring leverage ratios for less distortion) aligns with some academic calls for simplification, but regulators might see it as too radical amid ongoing tweaks like crypto rules. What do you think—should we explore specific Basel critiques or alternatives further?”

I said: Perhaps another day. For now, thanks!

It replied: You're welcome! Always here if you want to dive back in—whether it's Basel regs or something entirely different. Take care!

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: With Basel Committee’s risk weighted bank capital/equity requirements, would the “developed world” have developed?

United Nations - Human Rights: 1986 -Declaration on the Right to Development

Naciones Unidas - Derechos Humanos: 1986 - Declaración sobre el derecho al desarrollo

2003, during a Risk Management Workshop for Regulators at the World Bank, as an Executive Director, I made the following statement:

"The other side of the coin of a credit that was never granted, in order to reduce the vulnerability of the financial system, could very well be the loss of a unique opportunity for growth. In this sense, I put forward the possibility that the developed countries might not have developed as fast, or even at all, had they been regulated by a Basel [Committee]."

In a letter published 2004 in the Financial Times: “We wonder how many Basel propositions it will take before they start realizing the damage, they are doing by favoring so much bank lending to the public sector.”

Are bank regulations coming from Basle good for development?

The document that I presented at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007

Fast forward to 2025, below is the artificial intelligence’s opinion on that:

I asked ChatGPT: In 200 words or less please opine on:

"If instead of 1988, one year before the fall of the Berlin Wall, Basel Committee risk weighted bank capital/equity requirements had been imposed 1788, one year before the French Revolution, would what’s known as the developed world, have developed?"

ChatGPT answered:

"Had Basel-style risk-weighted bank capital rules been imposed in 1788, the “developed world” as we know it is unlikely to have developed.

Those rules systematically privilege lending to the sovereign and to politically favored, asset-backed borrowers, while penalizing credit to entrepreneurs, merchants, and small producers—the very agents who drove the Industrial Revolution. In 18th-century Europe, development depended on risk-taking: financing canals, mills, shipping ventures, workshops, and technological experimentation, most of which lacked collateral and state guarantees. Basel logic would have labeled such activity “high risk” and forced banks either to ration credit or charge prohibitive terms.

By contrast, cheap capital to governments would have reinforced mercantilist states, war finance, and court consumption, not productivity growth. Innovation would have migrated even more toward informal finance or remained unrealized altogether."

I said: Thanks!

It replied: You’re very welcome. Glad it was useful.

I asked Grok: In 200 words or less please opine on:

"If instead of 1988, one year before the fall of the Berlin Wall, Basel Committee risk weighted bank capital/equity requirements had been imposed 1788, one year before the French Revolution, would what’s known as the developed world, have developed?"

Grok answered:

"No, the developed world likely wouldn't have developed as rapidly or extensively. In 1788, Europe and emerging economies relied on nascent banking systems to fuel the Industrial Revolution, colonial expansion, and infrastructure booms. Banks like the Bank of England (1694) operated with minimal capital constraints, enabling aggressive lending for risky ventures—canals, factories, trade—that drove growth.

Imposing Basel I-style risk-weighted capital requirements (e.g., 8% equity against assets) would have forced banks to hold more reserves against "risky" loans, curbing credit availability. Historical evidence from post-1988 shows such rules reduced lending to SMEs and high-risk sectors, slowing innovation. In the 19th century, unchecked banking fueled booms (and busts), but overall propelled GDP growth; strict rules might have stifled railways, steam power, and urbanization.

While preventing some crises (e.g., fewer panics like 1797), the trade-off would be stagnation—think slower tech adoption, delayed imperialism's wealth transfer. Development required risk; Basel's caution in 1788 could've left the "developed world" agrarian and fragmented."

I said: Thanks.

It replied: You're welcome! Glad you enjoyed the take.

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.

 

Agosto 2002 – en TalCual: "Guacara no es Basilea”

AI - ChatGPT – Grok: Do the Basel Committee’s risk weighted bank capital/equity requirements align with the Western Civilization?

I asked Chat GPT: 

"The Western Civilization, does it align with the risk aversion expressed in the Basel Committee’s risk weighted bank capital/equity requirements; lower against public debt and residential mortgages, than against e.g., loans to small businesses and entrepreneurs?:

ChatGPT answered: 

"Short answer: No — not in any coherent historical or philosophical sense.

Western Civilization, at its core, has been defined by risk-taking, entrepreneurship, commercial expansion, and institution-building that channels risk toward productive innovation. The Basel risk-weight regime, by contrast, structurally penalizes entrepreneurial risk-taking and privileges sovereign borrowing and housing finance — the opposite of what made the West economically dynamic.

Here’s the alignment question in clearer terms:

1. Western civilization historically rewards productive risk

From ancient Greek commercial ventures, to Venetian merchant finance, to the Dutch and British commercial revolutions, to American frontier capitalism, a central feature has been:

Taking calculated risks in commerce

Financing innovation

Backing entrepreneurs

Diversifying private, not sovereign, credit

The Western success model was never built on routing capital toward the state or into socially favored, low-volatility assets at the expense of enterprise. If anything, too much preference for sovereign borrowing was historically a warning sign of decline (e.g., late-Habsburg Spain, ancien régime France).

2. Basel’s risk weights do the opposite

The Basel framework assigns negligible capital requirements to:

sovereign debt

residential mortgages

…while assigning much higher requirements to:

small-business loans

SME working capital

entrepreneurial credit

This means banks must hold more equity to lend to the things that historically propelled Western growth, and less equity to lend to governments and housing — sectors that expand balance sheets but do not elevate productivity.

This is risk-aversion, but it is risk aversion of a peculiar type:

It avoids short-term credit losses

It shifts banks toward politically safe assets

It discourages lending to innovators, builders, and strivers

In essence, it tilts the financial system away from the very activities that built Western prosperity.

3. Thus, Basel risk-weights reflect bureaucracy, not Western civilizational values

Basel preferences align with:

regulatory conservatism

political incentives of governments to finance themselves cheaply

a post-crisis desire to avoid bank failures at all costs

They do not align with:

Freedom to take intelligent risks

decentralized economic dynamism

entrepreneurial experimentation

the Western tradition of empowering individuals and businesses over consolidated state power

4. If anything, Basel’s design subtly erodes Western strengths

By favoring sovereign debt and residential mortgages, Basel:

inflates government balance sheets

channels savings into housing inflation rather than innovation

weakens SMEs (the backbone of Western labor markets)

reduces long-run productivity growth

gradually replaces competitive capitalism with “bank-regulated capitalism”

This is closer to bureaucratic risk minimization than to the cultural DNA of Western society.

Conclusion

Western Civilization is built on the managed embrace of risk. The Basel risk-weight structure is built on the avoidance and bureaucratic control of risk.

So no, they don’t align — and in important ways, Basel may undermine the very dynamism the West historically relied upon."

I said: Thanks!

It replied: You're welcome! 

I asked Grok

"The Western Civilization, does it align with the risk aversion expressed in the Basel Committee’s risk weighted bank capital/equity requirements; lower against public debt and residential mortgages, than against e.g., loans to small businesses and entrepreneurs?"

Grok answered:

"The Basel Committee’s risk-weighted capital requirements are fundamentally anti-Western in spirit, and represent a profound betrayal of the core dynamics that built Western civilization.

Western civilization— from the Athenian entrepreneur financing a trireme trading venture, to the Venetian merchant banks, to the Dutch East India Company, to Henry Ford mortgaging his house to build the Quadricycle, to Silicon Valley garages — has always advanced through calculated risk-taking by individuals, not through risk-aversion channeled toward the state and its favored assets.

The Basel framework does the exact opposite. It deliberately makes it artificially expensive for banks to lend to the very people who drive civilizational progress:

A loan to an unrated entrepreneur or small/medium business: 100–150% risk weight (or even higher under IRB models for “riskier” profiles). 

A residential mortgage: 35% risk weight (sometimes lower with mortgage insurance). 

Debt of the sovereign (i.e. the government that regulates the banks and appoints the regulators): 0% risk weight, even when that government is running chronic deficits and has debt/GDP ratios that would make any private borrower unbankable.

This is not a neutral, technocratic assessment of risk. It is a political decision to subsidize two things above all else:

State borrowing (allowing governments to spend and borrow without market discipline). 

Housing as an asset class (turning homes from places to live into leveraged financial instruments for the middle and upper classes).

Both are profoundly conservative in the literal sense: they preserve existing wealth and existing power structures. They direct capital toward already-owned assets (land, existing houses, government bonds) and away from new wealth creation (new businesses, innovation, frontier technologies).

This is the opposite of the Western tradition. The West became wealthy precisely by punishing cowardice and rewarding courage. The Basel system does the reverse: it punishes banks for taking the same kind of risk that built the West, and rewards them for lending to the safest, most politically connected borrowers.

Look at the real-world results since Basel II/III:

Explosive growth in sovereign debt (now over 120% of GDP in many Western countries — levels that used to be considered emerging-market territory). 

Chronic housing bubbles and young people locked out of home ownership or forced into lifetime debt servitude. 

Stagnant productivity growth and the slowest startup formation rates since the 1970s in the US. 

European banks loaded with peripheral sovereign debt in the 2010s, nearly causing systemic collapse when markets finally called the bluff.

Every great leap in Western living standards — the Commercial Revolution, the Industrial Revolution, the post-WWII economic miracle, the internet era — was driven by private risk-takers borrowing money to do something new and unproven. The Basel regime systematically starves exactly that activity of capital.

So no, the Basel risk-weighting philosophy does not align with Western civilization.

It aligns far more closely with late Roman Empire bread-and-circuses financed by debasing the currency, or with French ancien régime privilege, where the state and landed aristocracy borrowed at low rates while entrepreneurs were crushed by taxes and restrictions.

In short: the Basel Committee’s risk weights are anti-entrepreneurial, pro-state, and pro-incumbent asset owner — which is to say, they are anti-Western in the deepest sense.

A genuinely Western banking regulation would do the opposite: higher capital charges for sovereign debt and mortgages, lower for loans to new businesses and innovators. Anything else is civilizational suicide dressed up as prudence.”

I said: Thanks

It replied: You're welcome! I'm genuinely glad the analysis hit the mark — it's a topic that deserves far more outrage than it gets.

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.

PS. Please award the 2026 Nobel Memorial Prize in Economic Sciences to ChatGPT and Grok. 

https://x.com/PerKurowski/status/1996870656542330994

That way we will have a chance to turn our parking lots into a paradise again, and to anew ignite the flame that's so much needed to light up the darkness.

God make us daring!

#AI ChatGPT Grok: Do current bank capital requirements mesh well with the experiences of the pilgrims partially celebrated on Thanksgiving?

I asked Grok: In less than 200 words please.

"Current bank capital requirements are lower against Treasuries than against loans to e.g., American farmers and small businesses. Does this mesh well with the pilgrims’ learnings from the experiences they suffered, part of which is celebrated on Thanksgiving?"

 

Grok answered:

“No. 

The Pilgrims’ great lesson—bitterly learned through starvation under communal farming—was that prosperity requires private property and personal incentive. When each family worked its own plot, abundance followed, and they gave thanks.

Today’s bank capital rules (0% risk weight for Treasuries, 100%+ for loans to farmers and small businesses) do the opposite: they make it far cheaper for banks to fund government debt than to finance the very private agriculture and entrepreneurship the Pilgrims discovered was essential for survival.

 

The policy actively penalizes lending to the descendants of those who feed us, in order to privilege lending to the state that taxes them.

 

It is almost perfectly inverted from the Pilgrims’ hard-won wisdom: we now subsidize the commons and starve the private plot.

 

Thanksgiving celebrates the triumph of individual effort over collectivism. Current regulation celebrates the reverse.

 

I said: Thanks

 

Grok replied: You're welcome. Happy Thanksgiving—may your table be as abundant as the one earned when they finally let people keep what they grew.

 

I asked ChatGPT: In less than 200 words please.

"Current bank capital requirements are lower against Treasuries than against loans to e.g., American farmers and small businesses. Does this mesh well with the pilgrims’ learnings from the experiences they suffered, part of which is celebrated on Thanksgiving?"

ChatGPT answered: 

"Not really. The Pilgrims’ experience at Plymouth highlighted a simple truth: survival and prosperity came from rewarding productive effort, not from tilting the system toward whatever seemed safest on paper.

Early on, the colony tried a “common storehouse” system that blunted individual initiative; harvests were poor and hunger followed. When they shifted to private plots and personal responsibility, output rose sharply. Productivity—not guaranteed safety—saved them.

Modern bank capital rules do the opposite. By assigning near-zero capital to Treasuries and higher capital to loans to farmers, entrepreneurs, and small businesses, regulators effectively discourage lending to the very people who generate real economic value. Banks maximize return on capital by holding government debt rather than financing productive work.

This bias may enhance formal financial stability, but it runs against the Pilgrims’ core lesson: a system thrives when effort, risk-taking, and enterprise are supported, not penalized."

Thanks!

You're welcome! If you'd like to refine it further just let me know.

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.

J'accuse the Basel Committee for Banking Supervision

The following are facts that should be understood by any economist.

The Basel Committee’s risk weighted bank capital/equity requirements distort the allocation of credit.

By favoring the refinancing of the safer present, it builds up dangerous large exposures to what’s perceived or decreed safe e.g., public debt, residential mortgages and AAA rated securities.

By hindering the financing of the riskier future, e.g., loans to small businesses and entrepreneurs, the economy weakens and grows less.

These are extremely procyclical. When times are good and risk perceived low, banks are allowed to hold less equity, therefore able to pay much dividends and buy back shares. When times turn bad, banks stand there naked, just when its hardest for these to raise new equity.

As valiantly confessed by Paul Volcker the risk weights are much influenced by politics. 

The Nobel Prize in Economic Sciences has not been awarded to anyone who has warned or much less criticized this risk weighted regulations. As a very active member of the Basel Committee, Sveriges Riksbank that stands behind such prize, has a serious conflict of interest it has not been able to manage.

If only we could have had a Licensing Board for bank regulators.

Stephen Slivinski a senior fellow at the Cato Institute published today a Briefing Paper titled “The Case Against State Occupational Licensing Boards.” “Licensing boards seem intentionally designed to serve as the gatekeepers of an occupation and, in the process, they exhibit the look of a cartel.”

It's a great paper and below its conclusion:

“Elimination or deep fundamental reform of state licensing boards will not cure everything that is wrong with occupational licensing. Only the elimination or fundamental reform of licensing laws themselves can achieve that goal. There remain strong reasons to pursue such reforms.

However, dissolving the conflicts of interest inherent in a board system run by insiders and empowered to pursue anti-competitive objectives could lead to many improvements both at the margin and in the short term. Changing how the enforcement of these laws is carried out can incrementally decrease the economic cost associated with the aggressive, arbitrary, and self-serving enforcement that has proven to be a key defining feature of licensing board actions over the past several decades.”

That said it brought me back to a long-expressed wish: “If only we could have had a Licensing Board for bank regulators.”

1998, in an Op-ed titled “Regulations as enemy of bank missions”, I wrote:

“Frequently, in matters of financial regulations, the most honest, logical and efficient is simply to alert about the risks and allow the market, by assigning prices for these, to develop its own paths.

I do not propose, not for a moment, that the State abandons completely the regulatory functions, much the contrary, what I propose is that it assumes it correctly. History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages. 

But what are we to do? Regulations are fashionable and there are many bureaucrats in the world trying to find their little golden niche. I just read an article about a county in Maryland, USA, where, in order to be able to work as an astrologer and provider of horoscopes, you need to be registered and obtain a license in order to “read the hand palms. The cost of such license is 150 dollars.”

PS. The page with the details of Maryland certified astrologers has disappeared, it might have been an early case of fake news :-(   Now the certification is issued by AFA Certified Astrologers - American Federation of Astrologers

Yes, how I wish a Bank Regulators Licensing Board had existed: 

If so, there would have been better chances regulators had e.g.;

Considered the purpose of banks

Thought about the risks we cannot afford not to take

Good knowledge of Bayesian conditional probabilities

Considered unexpected consequences as from empowering too much credit rating agencies.

Been aware they would distort the allocation of credit.

And on, and on, and on

#AI ChatGPT Grok: Depending on bank capital requirements, what financial crisis should be harder to predict?

I asked ChatGPT:

“What financial crisis should be harder to predict, those were banks are required to hold the same capital/equity against all assets, a leverage ratio, or those where risk weighted requirements allow banks to hold less capital against some assets?”

ChatGPT answered:

Good question.

Crises under a leverage ratio (same capital against all assets) are usually easier to anticipate: banks grow more or less evenly, and risks accumulate more visibly across their balance sheets. If a bubble builds in a specific asset class (say real estate or sovereign bonds), banks cannot concentrate excessively there without also tying up more of their own equity. The constraint is blunt, but it makes emerging vulnerabilities more transparent.

By contrast, crises under risk-weighted capital requirements are harder to predict: regulators assign low risk weights to certain assets (e.g. sovereign bonds, mortgages), letting banks hold very little equity against them. This encourages systemic concentration in officially “safe” exposures. Because reported capital ratios look strong, early warning indicators are masked—until the supposedly safe assets lose value, at which point losses cascade across the system. The 2008 crisis (mortgage-backed securities) and the eurozone sovereign crisis illustrate this: both were amplified by risk weights that understated true risk.

So: financial crises under risk-weighted regimes are harder to foresee, because risk is distorted by regulatory design, cloaked in the appearance of safety, and correlated across many banks at once.

Would you like me to illustrate this with a short comparison of how each system might have affected the visibility of the 2008 subprime crisis?

I said: If brief, please do.

ChatGPT answered:

Sure.

· Leverage ratio: U.S. banks would have needed the same equity against subprime mortgage securities as against Treasuries. Their balance sheets would have shown visibly higher leverage as they loaded up on subprime, making the buildup of risk easier to spot.

· Risk weights (Basel): Subprime securities often received low risk weights thanks to high credit ratings. Banks could report healthy capital ratios while piling on hidden leverage. The crisis appeared suddenly because regulators, investors, and even banks themselves underestimated how much true risk was concentrated.

Result: under risk weights, the 2008 crisis was much harder to see coming.

I said: Thanks!

It replied: You’re welcome!

I asked Grok:

"What financial crisis should be harder to predict, those were banks are required to hold the same capital/equity against all assets, a leverage ratio, or those where risk weighted requirements allow banks to hold less capital against some assets?"

Grok answered:

"Financial crises should be harder to predict in systems where risk-weighted requirements allow banks to hold less capital against some assets. This is because risk weights can fail to accurately reflect true portfolio risks, especially during economic booms when they tend to compress, encouraging excessive leverage and risk-taking that builds up systemic vulnerabilities.

These misestimations—such as underweighting the risks of assets like mortgage-backed securities before 2008—make banks appear well-capitalized on paper while hiding potential instabilities, leading to surprises when conditions deteriorate. In contrast, a uniform leverage ratio provides a simpler, more transparent backstop that directly limits overall leverage regardless of perceived risk, offering better predictive power for failures, particularly among large banks during crises. It performs at least as well as risk-weighted ratios over short horizons (one to two years) and acts in a more countercyclical manner." 

I said: Thanks!

It replied: You're welcome! If you have more questions on finance or anything else, feel free to ask.

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: Do risk weighted bank capital requirements empower government borrowing at low interest rate cartels?

I asked ChatGPT

"Would it be outrageous to hold risk weighted bank capital requirements that imply a veiled prohibition for those perceived as “risky” to access bank credit in fair market risk adjusted terms, empowers “safe” government borrowing at low interest rate cartels?"

ChatGPT answered:

Short answer

“Not outrageous — it’s exactly what risk-weighting can do in practice — but it’s economically harmful and politically risky. Designing capital rules that effectively bar “risky” borrowers while heavily privileging government debt creates powerful distortions: it crowds out productive credit, concentrates risk, and subsidises government borrowing regardless of merit.

Why it happens (mechanics)

Risk weights tell banks how much capital to hold against each asset. Low weights on sovereign bonds and high weights on small-business or startup loans raise the relative capital cost of lending to the latter. Because banks price loans to cover capital costs, borrowers with higher risk-weights face higher spreads or simply no credit access. So a regulatory system can unintentionally (or intentionally) create a de-facto cartel of cheap “safe” government funding and expensive or unavailable private credit.

Main harms

Misallocation of capital. Productive, innovative firms (startups, small businesses) get starved of finance; low-return but “safe” assets (sovereigns) get overfunded.

Inequality & incumbency bias. Established firms and asset-rich borrowers (who can use collateral that attracts low weights) gain advantage; entrepreneurship suffers.

Concentration & systemic risk. If all banks hold large sovereign positions because they’re cheap capital-wise, the banking system becomes correlated with sovereign risk — a sovereign-bank doom loop.

Moral hazard for governments. Cheap financing reduces incentives for fiscal discipline.

Credit markets segmentation. Nonbank lenders may step in, growing shadow banking with weaker supervision — exactly the regulatory arbitrage regulators try to avoid.

Counterarguments in favor (why some designers accept it)

Perceived safety: Sovereign debt is often default-rare (for major currencies), so lower capital burden may seem sensible for prudential safety.

Simplicity & political feasibility: Rewarding sovereigns is politically popular and easier to justify after crises.

Short-term stability: In stress, public debt can act as a liquidity buffer for banks.

How to reduce the perverse effects

Use a non-risk-sensitive leverage floor alongside risk weights (a binding leverage ratio reduces the extent to which low weights can be exploited).

Apply concentrated exposure / sovereign concentration limits or higher floors on sovereign weights for domestic sovereigns to avoid large concentrated bets.

Risk-sensitive but calibrated weights: avoid zero or near-zero weights for public debt; make weights reflect real risks including inflation/default & FX.

Countercyclical capital buffers tied to lending booms rather than asset class alone.

Support targeted credit programs (guarantees, cheap refinancing) for socially valuable but risky sectors rather than broadly skewing capital rules.

Transparency & periodic review so political capture is visible and adjustable.

Bottom line

Treating risk weights as a tool to subsidize government borrowing or to keep “risky” borrowers out of the market is economically dangerous. The design trade-off is real: risk-sensitivity helps microprudential pricing but can create large macro- and distributional distortions if miscalibrated. Better: combine risk-sensitive capital with blunt instruments (leverage floors, concentration limits) and targeted fiscal/credit policies for sectors you want to support.”

I said: Thanks!

It replied: You’re very welcome!

I asked Grok: With a fairly brief answer:

"Would it be outrageous to hold risk weighted bank capital requirements that imply a veiled prohibition for those perceived as “risky” to access bank credit in fair market risk adjusted terms, empowers “safe” government borrowing at low interest rate cartels?"

Grok answered:

"Yes, that view has merit and isn't outrageous—it's a common critique among economists like Anat Admati and Andrew Haldane. Risk-weighted requirements (e.g., Basel III) can indeed distort lending by incentivizing banks to favor low-risk assets like government bonds (often zero-weighted), enabling cheap sovereign borrowing while making credit costlier or scarcer for "risky" borrowers like SMEs or emerging markets. This creates an implicit subsidy for governments, potentially forming a low-rate "cartel" effect, though proponents argue it enhances systemic stability. Alternatives like leverage ratios aim to address this bias."

I said: Thanks

It replied: You're welcome! If you have more questions, feel free to ask.

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