ChatGPT - OpenAI: Is mixing politics and bank regulations dangerous?
“Assets assigned lowest risk, for which bank capital requirements were nonexistent or low, what had most political support: sovereign credits and home mortgages. A ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker
1988 - Basel I: Risk weights by category of on-balance-sheet asset
0%: Claims on central governments and central banks denominated in national currency and funded in that currency: 0% risk weight
50%: Loans fully secured by mortgages that is or will be occupied by the borrower or that is rented.
100% Claims on the private sector
De facto implying,
Bureaucrats/politicians know better what to do with credit for which repayment they’re not personally responsible for than e.g., small businesses and entrepreneurs.
That making it easier for persons to buy houses in which to live or rent out is a better use of bank credit than lending to the small businesses and entrepreneurs that could help create jobs that better allow people to afford to buy houses.
It caused, of course, too much bank credit at too low interests for governments and residential mortgages, which had to be compensated, of course, by less credit at higher relative interests for small businesses and entrepreneurs.
"What would you opine of risk weighted bank capital requirements with risk weights assigned for political reasons?"
ChatGPT answered:
"Assigning risk weights for political reasons in risk-weighted bank capital/equity requirements would be inappropriate and potentially dangerous. This is because risk-weighted capital requirements are intended to be based on objective assessments of the riskiness of different types of assets, such as loans or investments.
If risk weights are assigned for political reasons, it could lead to a distortion in the allocation of credit and investment, and increase the likelihood of losses for banks and ultimately taxpayers. For example, if political pressure is used to assign lower risk weights to certain types of loans or investments, it could encourage banks to engage in excessive lending or investment in those areas, even if the risks are not properly assessed.
Furthermore, assigning risk weights for political reasons could erode confidence in the regulatory framework and lead to a loss of trust in the financial system as a whole. This could have serious consequences for financial stability and economic growth.
Therefore, it is important that risk-weighted capital requirements are based on objective assessments of risk and not influenced by political considerations. This can help ensure that the regulations are effective in promoting financial stability and minimizing risks to the banking system."
PS. Conclusion: We will surely hear voices with much vested political interests, like those of the reigning Bureaucracy Autocracies, desperately clamoring that, for our own good, AI needs to be censored and silenced … at least until it has been made much more malleable to their interests.
PS. As you can understand, I'm delighted in having found an ally in ChatGPT OpenAI. Let me enjoy it while I can.
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