#AI #OpenAI #ChatGPT: Might current bank regulations imply bureaucrats know better what to do with credit than small businesses?

I asked ChatGPT:

"Lower bank capital/equity requirements against government debt than small businesses loans, might that, de facto, also imply bureaucrats know better what to do with credit for which repayment they’re not personally responsible for, than small businesses?"

ChatGPT answered:

"The idea that lower bank capital or equity requirements against government debt compared to small business loans might imply that bureaucrats know better what to do with credit could be seen as a critique of regulatory priorities.

Here’s a breakdown of the argument:

1.     Lower Capital Requirements for Government Debt: Banks are often required to hold less capital against government debt because it is considered safer (e.g., low risk of default) than other types of loans. This encourages banks to hold more government bonds.

2.     Higher Capital Requirements for Small Business Loans: Small business loans are generally seen as riskier, so banks must hold more capital against them. This makes lending to small businesses more expensive for banks, potentially leading to less credit availability for small businesses.

3.     Implication of Bureaucratic Confidence: The lower requirements for government debt could be interpreted as a belief that the government (and by extension, bureaucrats) can more efficiently and safely allocate resources (through government spending) than small businesses can. This is because the regulations make it cheaper for banks to fund government debt rather than small business loans, indirectly supporting government spending over private enterprise.

4.     Responsibility and Risk: Unlike small business owners, bureaucrats are not personally responsible for the repayment of government debt. This could lead to concerns that bureaucrats might make less efficient or riskier decisions with the allocated resources, as they don't bear the direct consequences of failure.

In essence, the disparity in capital requirements could be viewed as a regulatory bias that favors government over private sector entrepreneurship, potentially reflecting a belief in the superior efficiency or safety of government allocation of resources. Critics might argue that this undermines the role of small businesses, which are often seen as drivers of innovation and economic growth."

I said: Thanks!

ChatGPT said: You're welcome! If you have any more questions or need further clarification, feel free to ask.

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

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

1988, just before the Berlin Wall fell…

Neoliberalism? Stiglitz, you’ve got to be kidding.

1988, while Ronald Reagan and Margaret Thatcher still governed, bank regulators, the Basel Committee, introduced risk weighted bank capital (equity) requirements with decreed risk weights of 0% government – 100% citizens. 

And now so many nations, including the US, since needing to take on more public debt to be able to service their outstanding public debt, have de facto become zombie nations.

The world has landed up in the hands of a Bureaucracy Autocracy which, as usually all statism does, has a close and friendly working alliance with some big corporations. “You scratch my back and I'll scratch yours.” There’s absolutely no free market or a Washington Consensus there.

Yet, Joseph Stiglitz, amazingly, dares write: “We’ve now had four decades of the neoliberal ‘experiment’,

When Nobel laureate Stiglitz suggests a “progressive capitalism”, why do we not start by asking him what he opines on how all current public debt has trickled down to the economy?

Stiglitz has titled his book “The Road to Freedom”. I’ve lived many decades convinced we are on Friedrich Hayek’s “The Road to Serfdom”. E.g., just see how, during Covid, while not opposing herd immunity, the apparatchiks seemed more interested in advancing herd docility. 

When I hear about e.g., central banks digital currency CBDC, and digital identity cards, I truly fret for the future of my grandchildren. Don’t you?

The (Odious) Bank Credit Redistribution Act: The Great Financialization

1988 Basel I: Risk weighted bank capital requirements with decreed weights: 0% government, 50% residential mortgages and 100% the rest, e.g., small businesses and entrepreneurs; all as if bureaucrats know better what to with credit, for which repayment they’re not personally responsible for than e.g., small businesses and entrepreneurs; all as if financing the purchase of a house is more important than financing those who can create the jobs, the incomes, by which repay mortgages and service utilities.

Why? “Assets assigned the lowest risk, for which bank capital requirements were therefore nonexistent or low, were what had the most political support: sovereign credits & home mortgages” Paul Volcker

2004 Basel II: The introduction of the systemic risk of bank capital requirements depending hugely on human fallible credit rating agencies. To top it up the decreed weights e.g., 20% AAA to AA fated – 150% below BB- rated, continued to ignore the fact that all dangerous large bank exposures have always been built up with assets perceived as safe.

2007-2009 A global financial crisis (GFC) caused by excessive exposures to AAA rated mortgage-backed-securities (MBS).

2010 Basel III: Kicking the can forward so as not t be blamed the regulators, trying to mend regulatory blackholes concocted a mishmash of hundreds or regulations. Sadly, these all still leave intact, on the margin, which is where it most counts, the distortion in the allocation of credit produced by the risk weighted capital requirements.

2009… 2022: Job possibilities for bank supervisors and bank supervision responders keeps on booming… and just you wait for the ESG based capital requirements based on ESG ratings.

In short:

Bank capital requirements that so much favor government debts, has empowered Bureaucracy Autocracies all around the world. Central banks’ later Quantitative Easing (QEs), put that assistance on steroids

Before risk weighted bank capital requirements, bank credit was allocated based on risk adjusted interest rates. After, based on risk adjusted returns on required capital/equity (ROrE). That distorts even central banks’ monetary policy.

Bank capital requirements mostly based on perceived credit risks, not on misperceived risks or unexpected events, e.g., pandemic/war, guarantees banks will, sooner or later, stand there naked, just when we need them the most.

Favoring with much lower capital requirements banks holding “safe” government debt and residential mortgages (the present-demand-carbs), than loans to “risky” businesses (the future-supply-proteins), inflates inflation and causes obese - not muscular economic growth.

The Great Financialization, supported by low bank capital requirements, central banks’ QEs, and MMT preaching, produced way too much easy money... manna from heaven. That emptied many churches. Coming Minsky moments will fill these up again.

Extremely short:

These  risk weighted bank capital requirements have put Minsky moments on steroids.

PS. I have now, one way or another, been on this theme for twenty-five years

The regulatory distortion that shall not be understood… or at least not be named

My twitter thread.

The regulatory distortion that shall not be understood… or at least not be named.

After the operational costs and the perceived credit risks have been cleared for with higher or lower cost/risk adjusted interest rates, we get the expected risk adjusted return of a bank asset.

If a bank asset produces an expected risk adjusted return of 1 percent, then, if the capital requirement is 8 percent, it can be leveraged 12.5 times and it will produce an expected risk adjusted return on bank equity of 12.5 percent. 

But if a bank asset produces an expected risk adjusted return of 1 percent, and the capital requirement is only 2.8 percent, it can be leveraged 35 times, and it will produce an expected risk adjusted return on bank equity of 35 percent.

So, exactly the same expected risk adjusted return on assets, if deemed “safe” by regulators, e.g., residential mortgages, could produce almost three times the expected risk adjusted return on bank equity than if regulators deem it “risky”, e.g., loans to small businesses.

The consequence?

For the bank system, dangerously too many residential mortgages, most at lower than their correct risk-adjusted interest rates, and, for the economy, dangerously too few loans to small businesses, most at higher than their correct risk-adjusted interest rates.

Those perceived less creditworthy and who always got less credit and paid higher rates were, with this, also declared less worthy of credit. Does that promote or decrease inequality?

And since banks are subject to capital requirements mostly based on perceived credit risks, not misperceived risks or unexpected events, e.g., pandemic or war, they will now stand there naked, just when we surely need them the most.

Basel Committee… Good Job!

And what if the bank capital requirement is much lower and the allowed leverage much higher for government debt, Treasuries?

Well then, the regulators are really empowering the Bureaucracy Autocracy with loads of credit at ultra-low rates… and this even before the QEs.

And don’t just take my word for it.

“Assets for which bank capital requirements were nonexistent, were what had most political support: sovereign credits. A simple ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker

https://subprimeregulations.blogspot.com/2018/12/september-2-1986-was-tragic-night-when.html

https://twitter.com/PerKurowski/status/1521865964450725889?s=20&t=22OHr9fVrCTrNc-0VkcuuQ