Should human intelligence not suffice to understand what could happen when bank regulations subsidize government borrowings?
Here’ a brief summary of answers ChatGPT – OpenAI (AI) gave me on questions about bank regulations and excessive government debt. (You can read the full conversation in the link below).
Q. “If allowing banks to hold much less capital against government debt than against other assets, does that not translate into a de facto subsidy of government borrowings?"
AI: "Allowing banks to hold less capital against government debt compared to other assets can indeed be seen as a de facto subsidy of government borrowings.”
Q. "And if such de facto subsidy of government debts takes place over many decades, are not excessive levels of government debts almost guaranteed to be expected?"
AI: "If a de facto subsidy of government debt occurs over an extended period, it can potentially contribute to the accumulation of excessive levels of government debt. Here's why:
1. Lower Borrowing Costs: When banks are incentivized to invest more heavily in government debt due to lower capital requirements, it can lead to increased demand for government bonds. This increased demand, in turn, can lower the borrowing costs for the government. With cheaper borrowing, governments may be inclined to borrow more and accumulate higher levels of debt than they otherwise would if borrowing costs were higher.
2. Reduced Market Discipline: When government debt is perceived as having lower risk due to regulatory treatment, it can reduce market discipline. Investors may rely on the assumption that government debt is safer, potentially overlooking the true risks associated with higher debt levels. This reduced market discipline can create an environment where governments feel more comfortable in accumulating debt, as they may face less pressure to maintain fiscal discipline
.3. Moral Hazard: A de facto subsidy of government debt can create a moral hazard situation. If governments believe that banks and financial institutions will always be willing to invest in their debt due to regulatory advantages, they may have less incentive to pursue responsible fiscal policies. This can lead to a lax approach to fiscal discipline and increased borrowing without adequate consideration of long-term sustainability.
It's important to note that excessive levels of government debt can have negative consequences, such as increased interest payments, reduced fiscal flexibility, and potential macroeconomic instability. Therefore, regulatory policies that inadvertently incentivize the accumulation of excessive government debt should be carefully assessed and monitored to ensure long-term fiscal sustainability and financial stability.”
My conclusion: I ask you all, sincerely, should human intelligence not suffice in order to give those answers?
Paul A. Volcker in his autobiography “Keeping at it” of 2018, penned together with Christine Harper, when referring to 1988’s Basel I wrote: “Assets for which bank capital requirements were nonexistent; what had most political support, sovereign credits. A ‘leverage ratio’ discouraged holdings of low-return government securities”
I’ve been asking over and over again whether the US Congress approved risk weights of 0% Federal Government – 100% We the People Frankly I do not think America’s Founding Fathers would have regarded that with great sympathy.
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