#AI #OpenAI #ChatGPT: Please help me express my arguments about the risk weighted bank capital requirements, in ways of a mathematical equation.
I asked ChatGPT:
Banks perceived credit risks and, to the best of their knowledge, act accordingly.
But regulators, the Basel Committee, with their risk weighted bank capital requirements (RWCR) also provided them with incentives to double down on perceived risks. That induced risk aversion and that seriously distorted the allocation of bank credit.
It’s been way too long since I did that, so, could you help me express the above in ways of a mathematical equation, so that I could argue with those who only respect what can be expressed in such way.
Please try to make it short, ideally in around 200 characters.
ChatGPT answered:
Sure! Here's a concise mathematical representation:
Bank Credit Allocation: C=f(Pr,R)C=f(Pr,R)
Where:
CC: Credit allocation
PrPr: Perceived risk (bank assessment)
RR: Regulatory risk weights (Basel RWCR)
Effect: ∂C∂R<0∂R∂C<0, amplifying risk aversion and distorting credit.
This shows that as regulatory risk weights RR increase, credit allocation CC decreases, especially for higher-risk borrowers, doubling down on perceived risks.
I told ChatGPT: Thanks! I hope you got it right :-)
It answered: "You're very welcome! I'm confident the formulation aligns with your concept: it highlights how regulatory risk weights RR amplify banks' aversion to perceived risk PrPr, distorting credit allocation CC. If you need further refinements or have more ideas to explore, let me know.
Good luck with your argument! 😊
Note: The answers are copied exactly from those given to me by ChatGPT
Posts
