ChatGPT - OpenAI: Should bank regulators/supervisors be aware of risks with US Treasury long term bonds?

I asked ChatGPT:

"Should bank regulators or supervisors be aware of the duration risk, interest rate risk with US Treasury long term bonds?"

ChatGPT answered:

"Yes, bank regulators or supervisors should be aware of the duration risk and interest rate risk associated with long-term US Treasury bonds held by banks.

Duration risk refers to the risk that a bond's price will decline due to changes in interest rates. When interest rates rise, the price of a bond with a longer duration will fall more than that of a bond with a shorter duration. Banks that hold long-term US Treasury bonds are exposed to duration risk because if interest rates rise, the value of these bonds will fall, leading to a decline in the bank's capital.

Interest rate risk refers to the risk that changes in interest rates will impact the bank's earnings and capital. If interest rates rise, the value of a bank's bond portfolio will decline, leading to a reduction in the bank's capital. Banks that hold long-term US Treasury bonds are exposed to interest rate risk because these bonds are highly sensitive to changes in interest rates.

Therefore, bank regulators or supervisors should be aware of the duration risk and interest rate risk associated with long-term US Treasury bonds held by banks. They should monitor the bank's bond portfolio and ensure that the bank has sufficient capital to withstand potential losses due to changes in interest rates. Additionally, regulators may require banks to conduct stress tests to evaluate the impact of changes in interest rates on their capital and profitability."

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

PS. My most recent takes on this:

1988 30 pages Basel I stated: “36. Claims on central OECD governments will attract a zero weight (or a low weight if the national supervisory authority elects to incorporate interest rate risk).” So, for 35 years, why did national regulators not consider that risk?

https://subprimeregulations.blogspot.com/2023/04/helping-fts-gillian-tett-and-other-to.html

https://subprimeregulations.blogspot.com/2023/03/bank-supervisorsexaminers-as-well-as.html

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

Houston, we’ve got another problem: Our central bankers’ are flying blind

In February of 2011, Alan Greenspan gave the keynote address during an event at the Brookings Institution on “Reforming the Mortgage Market”. He ended his speech by expressing that he really would like to know what the real mortgage rates would be in the US, without any of those many distortions which affect it.

I got no chance to question him in public but at the end of the event I managed to ask him: 

“Mr. Greenspan, would you likewise not want to know what the most important interest rate in the market, the interest rate on US Treasuries would be without distortions?” 

He looked at me and asked “What do you mean?” I told him: “I mean that interest rate which would result if banks were required to hold as much capital when lending to the US Treasury as they are when lending to a US citizen, a small businesses or entrepreneurs.” I felt for a moment Greenspan nervously doubting, but then he answered “Yes, I would!” 

And that is one of the sad facts today. Central banks, in the US and Europe, are basically flying blind, because they have not the faintest idea about what their real Treasury rates would be without the regulatory subsidies in favor of public borrowings they have introduced. 

And then we hear so much nonsense about this being a great time for public indebtedness because rates are so low… Rates low? Has no one factored in all the opportunity costs for the economy and job creation of all those small businesses and entrepreneurs who did, and do still not have access to bank credit in competitive terms? 

PS. So, Houston, we sure have got ourselves another serious problem.

PS. Might someone at long last be waking up?

Do not stimulate until you drop!

A letter to the Washington Post that was not published:

Sir given that the consumer shopped until they dropped the only thing to hope for after reading Greg Ip's article on January 11 where he analysis a possible default option of the US on its public debts… is that the US does not now stimulate until it drops. 

Even though there are many seminars on "How to restore Global Financial Stability" let us not forget that the most important role for the US is to preserve the global financial stability we still have, namely the current role of the dollar in the international financial system.

And so, just in case, and especially after the unsettling recent experience with the adjustable mortgages, could we not ask the US to build up its debt with long term paper at fixed rates? I mean allowing so many to anchor their boats so close to the exit of that safe-haven the dollar currently represents seems not the wisest thing to do.