#AI #OpenAI #ChatGPT Do regulators favor refinancing the safer present over financing the riskier future? If so, what about its consequences?

I asked ChatGPT:

By imposing lower bank capital requirements against what’s perceived or decreed as safe, than against what’s perceived as risky, could one argue the regulators prefer the refinancing of the safer present over the financing of the riskier future?

ChatGPT answered:

Yes, one could argue that by imposing lower capital requirements on what is perceived as "safe" compared to what is perceived as "risky," regulators are implicitly encouraging the refinancing of existing, less risky assets rather than the financing of potentially riskier, future-oriented ventures.

Here's the reasoning:

1. Lower Capital Requirements for "Safe" Assets: When regulators impose lower capital requirements on assets deemed "safe" (such as government bonds or highly rated corporate debt), banks are incentivized to allocate more capital to these assets. This makes it easier and cheaper for banks to hold or refinance existing, safe assets.

2. Higher Capital Requirements for "Risky" Assets: Conversely, higher capital requirements for riskier assets (like loans to startups or investments in innovative but uncertain technologies) make it more expensive and less attractive for banks to finance these ventures. This could discourage banks from providing capital for new, potentially transformative projects that carry higher risk but also higher potential for future growth.

3. Preference for Stability: Regulators typically focus on financial stability and risk mitigation. By encouraging banks to hold safer assets, they aim to reduce the likelihood of financial crises. However, this also means that the flow of capital is directed more towards maintaining and refinancing the present state of the economy rather than taking risks that could lead to future innovation and growth.

4. Impact on Economic Growth: Over time, this bias towards safety could lead to underinvestment in riskier, forward-looking projects that are necessary for long-term economic growth and innovation. The economy might become more stable in the short term, but at the cost of slower growth and reduced dynamism in the long term.

In summary, the structure of capital requirements can indeed reflect a regulatory preference for maintaining the status quo (the "safe" present) over investing in uncertain but potentially more rewarding future opportunities (the "risky" future).

I asked ChatGPT:

If so, could one also argue such regulation favors the wants of the current generation (grandfathers and parent) over the needs of the future generation (children and grandchildren)?

ChatGPT answered:

Yes, one could argue that such regulation, by favoring the refinancing of safer, established assets over riskier, innovative ventures, implicitly prioritizes the wants and stability of the current generation over the needs and potential opportunities for future generations. Here's how this argument might be structured:

1. Focus on Present Stability: Regulations that encourage banks to favor "safe" assets—often linked to established sectors or government debt—aim to maintain financial stability. This approach aligns with the interests of the current generation, who may prioritize preserving wealth and stability in the short to medium term.

2. Underinvestment in Future-Oriented Ventures: By imposing higher capital requirements on riskier investments, which often include funding for new technologies, startups, or infrastructure, these regulations can lead to underinvestment in areas that are crucial for long-term growth and innovation. The future generation, which would benefit from these developments, may find fewer opportunities for economic advancement and growth.

3. Intergenerational Equity: The preference for maintaining the current state of the economy could be seen as catering to the immediate needs and desires of the current generation, particularly those in or nearing retirement (grandfathers and parents), who might be more risk-averse. This can come at the expense of the future generation (children and grandchildren), who may face a less dynamic economy with fewer resources for innovation and growth.

4. Long-Term Consequences: While the current generation enjoys the benefits of stability, the future generation may inherit an economy that is less resilient to new challenges, less innovative, and potentially less capable of sustaining long-term growth. This could lead to a scenario where future generations are left with fewer opportunities and greater challenges.

5. Moral and Ethical Considerations: This situation raises questions of intergenerational equity, where the decisions and policies of one generation disproportionately affect the prospects of future generations. If regulations prioritize the short-term stability and preferences of the current generation, they might be neglecting the broader, long-term needs of those who will inherit the economy.

In summary, the regulation of capital requirements that favors safer, present-oriented investments could be seen as prioritizing the immediate wants of the current generation over the long-term needs and opportunities of future generations.

I said: Thanks!

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

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

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

#AI OpenAI - ChatGPT: If we compare the economy to a human body, do the current risk adverse bank capital requirements prescribe an adequate diet?

Me at the World Bank, 2003: “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.”

Fast forward 20 years. Now, in 2023, I asked ChatGPT:

"If for illustration purposes we compare the economy to a human body, could we argue that government loans and residential mortgages are somewhat akin to carbs, while loans to small businesses and entrepreneurs are more like proteins?"

ChatGPT answered: 

"Comparing the economy to a human body and drawing parallels between different financial instruments and nutrients can be a useful way to illustrate economic concepts, but it's important to remember that such analogies are simplifications and may not capture the full complexity of the economic system. That said, let's explore your analogy:

1. Government Loans and Residential Mortgages as Carbs:

Carbohydrates are a primary source of energy in the human body. Similarly, government loans and residential mortgages can be seen as providing a foundational source of capital in the economy. Government loans, such as bonds, are often used to finance public projects and government operations. Residential mortgages provide individuals with the means to purchase homes, which are essential assets for many families.

2. Loans to Small Businesses and Entrepreneurs as Proteins:

Proteins are essential for growth and repair in the human body. Loans to small businesses and entrepreneurs can be likened to proteins because they support the growth and development of businesses, which are vital for economic progress. These loans often help businesses expand, create jobs, and innovate, contributing to economic development and stability.

While this analogy helps highlight the different roles that various types of loans play in the economy, it's important to note that the real-world economy is far more complex. Economic systems involve numerous interrelated factors and actors, including households, businesses, financial institutions, and governments. Loans and mortgages also vary widely in their characteristics, terms, and purposes.

Moreover, the analogy doesn't account for the risks and potential downsides associated with these financial instruments. For example, excessive government borrowing can lead to debt-related challenges, and the housing market can experience bubbles and crashes that impact the broader economy. Similarly, lending to small businesses carries risks related to business success and economic conditions.

In summary, while comparing the economy to a human body and using nutrient analogies can be a helpful way to explain economic concepts, it's essential to recognize the inherent simplifications and limitations of such analogies. The economy is a complex and dynamic system influenced by a multitude of factors, making it challenging to fully capture its intricacies through simple comparisons."

I asked ChatGPT:

"In line with the previous question, the current risk weighted bank capital requirements incentivizes banks to hold much more “safer” carbs than “riskier” proteins. Does this not risk causing an obese economy, meaning too much fat and too little muscles?"

ChatGPT answered: 

"Your analogy of "safer" carbs and "riskier" proteins in the context of risk-weighted bank capital requirements is an interesting way to frame the potential issue with these requirements. However, it's important to clarify a few points:

1. Risk-Weighted Bank Capital Requirements: Risk-weighted capital requirements are a regulatory framework that requires banks to hold a certain amount of capital as a cushion against potential losses on their assets. The idea is to ensure that banks have enough capital to absorb losses in case of economic downturns or adverse events. The level of capital required varies depending on the perceived riskiness of the assets on a bank's balance sheet. Safer assets, like government bonds, typically have lower risk weights, while riskier assets, like loans to small businesses or complex financial instruments, have higher risk weights.

2. Obese Economy vs. Muscular Economy: In your analogy, an "obese economy" could be interpreted as an economy with an overreliance on low-risk, low-return assets (the "safer" carbs). A "muscular economy," on the other hand, might imply an economy with a healthier mix of assets, including riskier but potentially more rewarding investments (the "riskier" proteins).

The concern you raise is valid. If banks are incentivized to hold predominantly low-risk assets to meet capital requirements, it can lead to an allocation of capital that favors safe but potentially lower-yielding investments. This could result in lower economic growth and innovation, as resources are not efficiently allocated to more productive uses. It may also hinder the growth of small businesses and entrepreneurship, which are often seen as the "muscles" of the economy.

Regulators and policymakers are aware of this issue, and there have been ongoing discussions and reforms aimed at addressing it. The challenge lies in striking a balance between financial stability (ensuring banks have sufficient capital to weather crises) and economic growth (encouraging investment in riskier but potentially more productive ventures). Reforms may include adjusting risk weights, enhancing transparency in risk assessment, and encouraging banks to diversify their portfolios.

In summary, your analogy highlights a genuine concern in the financial regulatory framework. Striking the right balance between safety and growth in the banking sector is a complex task, and policymakers continually strive to adapt regulations to ensure a healthy and balanced economy.

I asked ChatGPT:

"Would not such an obese economy pose a serious danger to our bank systems? 

If, so does it illustrate an unexpected consequence of regulatory risk-aversion, or one that should have been expected?"

ChatGPT answered: 

"An "obese" economy, as you described it, with an overemphasis on safer but lower-yielding assets, can pose risks to the banking system and the broader economy. This situation can be a consequence of regulatory risk-aversion, and it highlights some of the unintended consequences that can arise from well-intentioned regulations.

Here's how such an obese economy can pose dangers to the banking system:

1. Reduced Profitability: When banks are primarily incentivized to hold low-risk assets to meet capital requirements, their profitability may be constrained. Safer assets typically yield lower returns, which can reduce banks' ability to generate profits. Over time, this may limit their capacity to absorb losses and invest in other aspects of their operations.

2. Inefficiency: An economy overly reliant on low-risk assets may become less efficient. Capital that could be allocated to more productive, growth-oriented ventures, such as loans to small businesses or innovative startups, may instead be tied up in low-yield, low-risk assets like government bonds. This inefficiency can hinder overall economic growth.

3. Systemic Risk: Paradoxically, excessive risk-aversion by banks and regulators can lead to systemic risk. If banks collectively focus too much on the same safe assets, they may become highly correlated in their behavior. This means that when a downturn does occur (even if it's not directly related to the safe assets), the entire banking system could be vulnerable, potentially leading to a systemic crisis.

4. Dampened Innovation: An overly conservative approach to lending can stifle innovation and entrepreneurship, as it becomes more challenging for riskier ventures to secure funding. This can hinder long-term economic growth and job creation.

Should these dangers have been expected? To some extent, yes. Regulatory risk-aversion, while designed to enhance financial stability, has long been recognized as having the potential to create unintended consequences. Economists and policymakers are aware of the trade-offs involved in financial regulation. They understand that striking the right balance between risk mitigation and economic growth is challenging.

Over time, regulations have evolved in response to such concerns. Regulatory agencies have made efforts to fine-tune risk-weighted capital requirements, promote diversification of bank portfolios, and encourage lending to key sectors like small businesses.

In conclusion, the dangers posed by an obese economy, resulting from excessive risk-aversion in regulations, are recognized by experts in finance and economics. They illustrate the complexity of regulatory decision-making and the need for ongoing evaluation and adjustment of regulatory frameworks to achieve both financial stability and economic growth.

I asked ChatGPT:

"One last question: Do you think these dietary instructions the regulators prescribed for our banks, show sufficient considerations to the economy our children and grandchildren will have to live with?"

ChatGPT answered: 

"The regulatory decisions made by policymakers and regulators in the financial sector are intended to strike a balance between short-term financial stability and the long-term health of the economy. However, predicting the exact economic conditions that our children and grandchildren will face in the future is extremely challenging, and regulatory decisions are often made with the best information available at the time.

Here are some considerations regarding the regulatory framework and its implications for future generations:

1. Financial Stability: Ensuring the stability of the financial system is a primary concern for regulators. They aim to prevent the types of financial crises that can have severe and lasting effects on the economy. This focus on stability is intended to create a more secure foundation upon which future economic growth can be built.

2. Balancing Risk and Growth: As discussed earlier, regulators must strike a balance between risk mitigation and economic growth. The choices made today can influence the availability of credit, economic innovation, and entrepreneurial opportunities for future generations.

3. Adaptability: Regulatory frameworks should ideally be adaptable to changing economic conditions. Policymakers recognize that the economic landscape evolves, and regulations may need to be adjusted to meet new challenges and opportunities.

4. Long-Term Impact Assessment: Regulatory decisions should ideally consider their potential long-term effects on economic sustainability, job creation, and innovation. However, predicting the precise long-term consequences of regulatory actions can be difficult.

5. Interconnected Global Economy: Today's economy is highly interconnected on a global scale. Decisions made by one country's regulators can have ripple effects worldwide. Regulators often need to consider the global implications of their actions, as future generations will inherit an increasingly interconnected global economy.

In summary, regulatory decisions are typically made with the aim of balancing immediate financial stability with the long-term health of the economy. However, predicting the exact economic landscape that future generations will face is challenging. It's essential for policymakers and regulators to be mindful of the potential long-term consequences of their actions and to maintain a dynamic and adaptable approach to regulation to ensure the best outcomes for future generations. Additionally, policymakers often seek input from economists, experts, and the public to make informed decisions that consider the interests of current and future generations."

Thanks!

"You're welcome! If you have any more questions in the future or need further information, feel free to reach out. Have a great day!"

Note: The answers are copied exactly from those given to me by OpenAI

Here is how Grok answered the same question.

PS. In Martin Wolf’s Economic Forum in October 2009, I wrote: “Please free us from imprudent risk-aversion and give us some prudent risk-taking”

PS. My 2019 letter to the Financial Stability Board (FSB)

PS. Some of my many previous references to carbs v.s proteins in banking.

https://subprimeregulations.blogspot.com/2014/12/europe-america-use-average-risk.html
https://subprimeregulations.blogspot.com/2015/03/i-dont-know-whether-to-laugh-or-cry-but.html
https://teawithft.blogspot.com/2013/02/european-youth-is-still-unaware-of-how.html
https://teawithft.blogspot.com/2015/08/we-need-free-finance-sector-able-to.html

PS. Here on violations of that "Holy Intergenerational Social Contract" Edmund Burke spoke about.

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

Edmund Burke would have required the current bank regulations to be totally reformed

In a letter published by Washington Post 2015 titled “Reverse mortgaging the future” I wrote that the current risk weighted bank capital requirements implied that “we refused those coming after us the risk-taking that brought us here and, in such a way, we baby boomers — or at least our elite — allowed the intergenerational holy bond that Edmund Burke wrote about to be violated.”

Days ago, I began reading the introduction to “Edmund Burke and the Perennial Battle, 1789-1797” written by Daniel B. Klein and Dominic Pino. I got to page 9 and there found Edmund Burke mentioning “four hurdles that an abuse must clear in order to be worthy of reform.”

So here I go.

First. “The object affected by the abuse should be great and important.”

I submit that banks and their allocation of credit to the real economy is of utmost importance.

Second. “The abuse affecting this great object ought to be a great abuse.”

I submit that imposing how much capital/equity/skin in the game banks should hold against different assets will much determine to what/whom, how much and at what interest rates banks are willing to lend. 

Third. “It ought to be habitual, and not accidental.

I am sure the risk weighted bank capital requirements concocted by the Basel Committee for Banking Supervision and implemented for more than three decades by bank regulators all around the world meet perfectly both these criteria.

Fourth. “It ought to be utterly incurable in the body as it now stands constituted”.

Regulators who for decades have been unable to even acknowledge, much less discuss the existence of serious problems with their rulings, has sufficiently demonstrated a total incapacity to change and reform on its own.

And to what regulatory abuse am I referring to?

1.- Even though ALL bank crises ever have resulted from the build-up of excessive exposures with assets ex-ante perceived as safe but that ex-post turned out risky, regulators based their risk weighted bank capital requirements on that what’s perceived risky is more dangerous to bank systems than what’s perceived safe.

2.- Banks mostly subject to capital requirements based on perceived credit risks, not on the certainty of misperceived risks or unexpected events, e.g., a pandemic or a war, will stand there naked, just when we surely need them the most.

3.- When outlook seems rosy and risks are perceived low, banks will be allowed to pay large bonuses, large dividends and carry out share buy backs so, when times turn bad, banks will stand there naked, just when we might need them the most, just when it is harder for them to raise capital.

4.- By decreeing risk weights of 0% governments and 100% citizens the regulators indicate their belief bureaucrats know better what to do with (taxpayer’s) credit than e.g., small businesses and entrepreneurs with their own; something which has strongly empowered the Bureaucracy Autocracies around the world

5.- Risk weighted bank capital requirements much favor banks holding “safe” government debt & residential mortgages (demand-carbs-the present) over loans to “risky” businesses (supply-proteins-the future). The result: economic obesity that morphs into stagnation.

6.- Allowing banks to leverage more their capital/equity/skin-in-the-game when financing the safer present than when financing the riskier future, clearly violates that holy intergenerational bond Edmund Burke wrote about.

7.- And so on… and on and on.

PS. Here’s a reference to a more recent violation of that holy intergenerational social contract Edmund Burke spoke about. The response to Covid.

PS. And the elder will also be hurt since social security will be failing too.

FSB’s Mark Carney is no one to lecture us on inequality, lack of opportunities and intergenerational divide

Mark Carney, the Governor of the Bank of England, in a speech titled “The Spectre of Monetarism” December 5, 2016 said: 

“For both income and wealth, some of the most significant shifts have happened across generations. A typical millennial earned £8,000 less during their twenties than their predecessors. Since 2007, those over 60 have seen their incomes rise at five times the rate of the population as a whole. Moreover, rising real house prices between the mid-1990s and the late 2000s have created a growing disparity between older homeowners and younger renters...  At the same time as these intergenerational divides are emerging, evidence suggests that equality of opportunity in the UK remains disturbingly low, potentially reinforcing cultural and economic divides.”

But Mark Carney is also the current Chairman of G20’s Financial Stability Board and, as such, one of the primarily responsible for current bank regulations… the pillar of which is the risk weighted capital requirements for banks.

That piece of regulation decrees inequality resulting from negating “the risky”, like SMEs and entrepreneurs fair access to bank credit. 

That piece of regulation favors the financing of “safe” basements where jobless kids can stay with their parents over “riskier” ventures that could provide the kids in the future the jobs, so that they had a chance to become responsible parents too.

That piece of regulations is a violation of that holy intergenerational bond Edmund Burke spoke about.

Carney also said: “Higher uncertainty has contributed to what psychologists call an affect heuristic amongst households, businesses and investors. Put simply, long after the original trigger becomes remote, perceptions endure, affecting risk perceptions and economic behaviour. Just like those who lived through the Great Depression, people appear more cautious about the future and more reluctant to take irreversible decisions. That means less willingness to put capital to work and, ultimately, lower growth.”

If any have suffered form “affect heuristic” that is the bank regulators. Mixing up ex ante perceptions with ex post possibilities, these decided on “more risk more capital – less risk less capital”, without: defining the purpose of banks “A ship in harbor is safe, but that is not what ships are for.” John A Shedd; or looking at what has caused bank crises in the past “May God defend me from my friends, I can defend myself from my enemies” Voltaire

Mark Carney also said “For two-and-a-half centuries, the prices of government bonds and the prices of equities tended to move together: the typical bull market entails rising equity prices and falling bond yields, with the reverse in bear markets. Since the mid-2000s, however, this pattern has reversed and bond yields have tended to fall along with equity prices”.

He is not able to connect that to the fact the risk weight given to sovereign debt is 0%, as compared to one of 100% for We the People… and that capital scarce banks therefore shed “riskier” assets in favor of public debt. As statist, Carney also ignores the fact that regulation has subsidized public borrowings, paid of course by negating credit opportunities to SMEs and entrepreneurs.

Must one go on a hunger strike in order to get some contestability from the Basel Committee or the Financial Stability Board?

P.S. Washington Post. December 2018: “Affordable homes or houses as investment/retirement assets?”

A letter in Washington Post: Reverse-mortgaging the future

Reverse-mortgaging the future

The reverse mortgage on the economy the baby boomers allowed will forever shame their intellectual elite.

In 1988, the Basel Capital Accord introduced the concept of credit-risk-weighted capital requirements for banks. More risk, more capital — less risk, less capital. That allowed banks to leverage more, and therefore to earn higher risk-adjusted returns on equity when lending to the safe as opposed to the risky.

As a result, it also imposed a de facto reverse mortgage on the economy, which extracted the value it already contained, as banks focused more on refinancing the safer past than the riskier future.

And that also meant we refused those coming after us the risk-taking that brought us here and, in such a way, we baby boomers — or at least our elite — allowed the intergenerational holy bond that Edmund Burke wrote about to be violated. That is something the good we might have done in the 1960s will never be able to excuse.

Read what AI – ChatGPT and Grok answered in 2025, when I asked whether current bank regulations aligned with the Western Civilization

When will US Congress or Scotus review the constitutionality of current risk weighted bank capital requirements?

PS. The capacity to borrow at a reasonable cost is a very valuable strategic sovereign asset. It should not be squandered away by the generation in turn only to benefit its members, or with some non-productive investments. 

PS. In 1988, when bank regulators decreed a 0% risk-weight for US public debt, its debt was $2.6 trillion, 50% GDP. Now on way to $ 30 trillion, about 130% GDP, it still has a 0% risk weight. When do you think its risk weight should increase to 0.01%?

PS. The response to Covid is another occasion in which the holy intergenerational contract Edmund Burke wrote about is being violated.

PS. Some couples might benefit from a reverse mortgage on their house, but it would be very irresponsible for a whole nation/generation, to place a reverse mortgage on all the economy. Modern Monetary Theory (MMT) is a poisonous Love Potion Number Nine.

PS. My 2019 letter to the Financial Stability Board (FSB)

It should not be surprising if those young living in the basements of their parents’ houses one day shout out: “Ma-Pa, now it’s our turn to live upstairs, you move down to the basement!” 

This letter in The Washington Post 

My letters in the Washington Post on bank regulations:
September 6, 2007: Factors in the Financial Storm
June 20, 2008: An Aspect of the Bubble
December 27, 2009: Another 'worst': Faulty bank regulation
January 6, 2012: Handcuffed by a triple-A rating
May 1, 2013: An American approach to banking
December 23, 2014: Let the market rule on risky trades
November 11, 2015: Reverse-mortgaging the future
August 9, 2016: Banks, regulators and risk
April 16, 2017: When banks play it too safe
July 11, 2018: There is another tariff war that is being dangerously ignored.
December 30, 2018: Affordable homes or investment assets?
April 19, 2020: The capacity to borrow is a valuable sovereign asset.
November 28, 2022: Before the debt ceiling is lifted
August 22, 2023: The economic revolution

#BoEOpenForum: What a great opportunity to make questions that have bothered me for over a decade, but which are never responded

The Bank of England announced: “Send your thoughts and ideas by email to: OpenForum@bankofengland.co.uk We will publish as much of this material as we can.”

And so I did, and they replied: “Thank you for your e-mail regarding the Open Forum on Building Real Markets for the Good of the People. We welcome your interest in the event, which is due to take place on 11 November 2015 at the Guildhall, London.”

Below is what I sent… have you seen any answer?

Bank of England, how can you justify the pillar of current bank regulations that have emanated under the Basel Accord, the credit-risk weighted capital requirements for banks? More ex ante perceived credit risk, more capital (meaning mostly equity) – less risk, less capital.

1. Banks already consider credit risks when setting risk premiums and deciding on the size of their exposures. And so, considering that same credit risk again, when setting the capital requirements, causes credit risks to be excessively considered. Don’t we all know that any risk perfectly perceived results in the wrong actions, if excessively considered?

2. Why do regulators concern themselves with the risk of banks’ assets when they should really be concerned with how the banks manage those risks? Motorcycles are indeed riskier than cars, but many more die in car than in motorcycle accidents.

3. This regulation allows banks to leverage more with what is perceived as safe than with what is perceived as risky; meaning that banks will be able to earn higher expected risk adjusted returns on equity when lending to what is safe than when lending to what is perceived as risky; resulting in that banks will lend too much to what is perceived as safe, and too little to what is perceived as risky… like to SMEs and entrepreneurs.

4. And this means in essence that banks will be prone to stay away from financing the riskier future, and keep to refinancing the safer past. How come regulators did not define the purpose of banks, like allocating credit efficiently to the economy before settling for these capital requirements? Is being a safe mattress in which to stack away or savings, the reason why society supports the banks? That does not sound right. If regulators cannot resist the temptations to distort, why not do so based on the SDGs?

5. Besides, if capital requirements are primarily to serve as a buffer against unexpected losses, something regulators have explicitly accepted, how on earth can one justify these to be based on expected credit losses? Is it not really so that the safer something is perceived, the greatest is its potential to deliver unexpected shocks?

6. And all that credit risk aversion for what? Is it not so that no major bank crisis ever, has resulted from excessive financial exposure to assets perceived as risky when booked? Have these not always resulted from excessive financial exposures to what was wrongly considered as very safe assets when booked? What empirical data gathering about the ex post causes of bank failures and bank crises did bank regulators do, before settling for these capital requirements that are based solely on ex ante perceived credit risks?

7. And those capital requirements have seeded all type of confusion in the market. That can clearly be evidenced with the number of time specialized media, and even financial officer of high status, have made historical comparisons between the non-risk weighted capital of banks in the past and this modern credit risk-weighted concoction. Do you really think risk-weighted capital requirements allow for any sort of reasonable comparison between banks?

8. And why do you accept the increasing complexity that, with the exceptions of those who make a living out of it, serve no one well? From about 30 pages in Basel I to what there is now. And add to that massive local regulatory documentation. And how come you can sit back and not scream when subject to intellectual waterboarding, by for instance the European Commission’s decreeing “a supporting factor equal to 0,7619 to allow credit institutions to increase lending to SMEs.”?

9. Besides, the regulators set the risk weight for sovereigns much lower than for any other borrowers…. zero percent sovereigns -100 percent private sector! Some could justify that arguing that sovereigns can print money and are therefore always able to repay. But does that not ignore that sovereigns quite often end up repaying with printed money worth much less; or requiring extra taxpayer assistance. And does not that, which makes it easier for governments to borrow, imply regulators believe government bureaucrats can use bank credit more efficiently than the private sector? Are current bank regulators allowed to act as statist activists?

10. And with the above referenced regulatory favoring of that sovereign debt that is usually used as reference for the risk free rate, do we now not have a subsidized free rate that is impossible to interpret?

11. We are here thanks to the risk-taking of generations before us. Are we morally allowed to accept risk adverse regulations that negates next coming generations the risk-taking they deserve and need? Does that not break that holy intergenerational bond Edmund Burke spoke about? God make us daring!

12. And odiously discriminating in favor of The Safe, and therefore against The Risky, and thereby negating many the opportunities of betterment, is that not the surest way to increase inequalities?

13. Leverage ratios that do not depend on credit risk, are now being imposed on banks; and this undoubtedly creates extra capital scarcity. Just like when crossing a desert you sacrifice those who most consume scarce water reserves that makes on the margin the credit risk weights even more distortionary. Do regulators ignore how pro-cyclical these regulations are?

14. Though I have many other similar observations, let me just finalize here by asking: Why is it that a person like me, who has more than enough professional and academic background to be making these questions, who has proven like very few having alerted to the dangers of current bank regulations, even while being an Executive Director of the World Bank (2002-04); who has formulated thousands of questions on this issue during more than a decade, in all type of venues, has not been able to receive any sort of clear answers?

Friends, in 1999 in an Op-Ed I wrote “the possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”. We have already experienced one AAA-bomb exploding, but our regulators keep taking us down that same crazy road. BoE could you please help us stop them?

Yours truly,

Per Kurowski

PS. Mark Twain has been attributed with saying that the bankers are those who want to lend you the umbrella when the sun shines and want to take it away when it is raining. Dear BoE, what is to be gained by making bankers want to lend you the umbrella even more when the sun shines, and take it away even more when it looks like it is going to rain?

PS. If you need references of me here is what I can document having written early:

http://subprimeregulations.blogspot.com/2004/11/some-of-my-early-public-opinions-on.html

And since then you can find my many thousands comments in:

http://subprimeregulations.blogspot.com

http://teawithft.blogspot.com/search/label/subprime%20banking%20regulations

http://financefordevelopment.blogspot.com

G20, keeping our economies from stalling and falling might depend on unregulated shadow banks… a ‘Banca sommerza’.

On September 17, New Rules for Global Finance and the International Trade Union Confederation are hosting a seminar titled “Reducing Unemployment & Inequality: Policy Options for the G20”

And I wanted the participants, in preparation for it, to read the following which is quoted from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created] 

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

And then I wanted the participants to reflect on the fact that the pillar of current bank regulations, is the perceived-credit-risk capital requirements for banks, less risk less capital - more risk more capital.

That allows banks to earn much higher risk-adjusted returns on equity on what is perceived as safe than on what is perceived as risky. And this, as should easily be understood, kills the opportunities for SMEs and entrepreneurs to have fair access to that bank credit with which they could help generate the next harvest of decent jobs. As you should understand it also serves as a potent inequality driver.

Friends, or we free our formal banks from this loony regulatory risk aversion to credit risk already cleared for by risk premiums and size of exposures, or the interests of job creation and equality might be best served by unregulated banks operating in the shadows… a Banca Sommersa. 

You decide, personally I am surprised to see a big majority of progressives keeping silence on bank regulations that clearly serve best the interests of “the respectfully affluent”… or those of aging baby-boomers’ après nous le deluge.

Let us responsibly live up to our part in that intergenerational continuum of the past, the living and the unborn, that Edmund Burke spoke about.

And this issue is also relevant to many of those you would define as being as far away as possible from the progressives… but which is of course no reason to shy away from it... much the contrary.

As an example, Mark R. Levin initiates his “Plunder and Deceit” by asking: “Can we simultaneously love our children but betray their generations and generations yet born? 

G20, please, for the future of our descendants, let us pray together “God make us daring!”

Why on earth do regulators refuse to discuss the issue of how their bank capital requirements distort the allocation of credit to the real economy? I once again refer to Galbraith’s Money: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”

What shall we do with regulators that have clearly failed? I once again refer to Galbraith’s Money: “We should be kind to those whose performance has been poor. But we must never be so gracious as to keep them in office.”

Frankly, what does for instance a Thomas Piketty from University Boulevard, know about unequal opportunities on Main Street?

@Per Kurowski

Am I a radical of the middle? Yes, or perhaps only an extremist of the center.