#AI #ChatGPT #Grok: Would better access to bank loans help small businesses and entrepreneurs to capture more of the value of their efforts? Would that not be good for the economy?

 I asked ChatGPT:

 Briefly: “If easier access to bank loans had helped small businesses and entrepreneurs to build up a bit more the value of their companies before accessing private capital markets, would these have been able to negotiate better terms?”

 

ChatGPT answered:

 

“Briefly: yes, very likely.

 

Easier access to bank loans would have allowed small businesses and entrepreneurs to survive longer, scale revenues, professionalize operations, and demonstrate viability before turning to private capital markets. That extra time and growth typically translate into higher valuations, lower perceived risk, and stronger bargaining power.

 

As a result, founders could have negotiated better terms—less dilution, fewer control rights conceded, milder liquidation preferences, and more founder-friendly governance. In short, bank credit can act as a bridge to value creation, whereas premature reliance on private equity or venture capital often forces entrepreneurs to sell optionality cheaply.

 

The caveat: this holds only if credit is priced sensibly and allocated based on fundamentals rather than distortive regulation or moral hazard.

 

I asked ChatGPT:

 

Briefly: "Therefore, can the regulatory risk aversion introduced by bank regulators, with risk weighted bank capital requirements, be said to have benefitted the PCMs, at the cost of the original growth generators? If yes, is that good for the economy long term?"

 

ChatGPT answered:

 

“Briefly: yes—and likely no.

 

“Yes, regulatory risk aversion embedded in risk-weighted bank capital requirements plausibly shifted financing away from banks toward private capital markets (PCMs). By making loans to small, young, or opaque firms capital-intensive for banks, regulators raised their cost or reduced their availability. That left entrepreneurs earlier and more dependent on PCMs, which benefit from greater deal flow, bargaining power, and rents.

 

Is that good long term? Likely not. While PCMs are effective at scaling proven firms, they are generally poor substitutes for broad, early-stage bank credit. The result is less experimentation, slower diffusion of new firms, greater concentration, and more value captured by financiers rather than creators. Economies grow from many small failures and a few big successes—a process bank credit historically supported.

 

In short: stability may have improved at the margin, but growth dynamism was likely taxed.”

 

I said: Thanks!

 

It replied: You’re very welcome, Per. Glad it was useful.

I asked Grok:

 

Briefly: “If easier access to bank loans had helped small businesses and entrepreneurs to build up a bit more the value of their companies before accessing private capital markets, would these have been able to negotiate better terms?”

 

Grok answered:

 

“Yes, in many cases. Easier access to bank loans could enable small businesses to achieve higher valuations through organic growth, stronger financials, and proven traction—reducing desperation for capital and allowing them to negotiate from a position of strength. This often results in better terms like higher equity retention, lower dilution, or more favorable valuations from private investors (e.g., VC or PE firms). However, outcomes depend on market conditions, business performance, and investor appetite.”

 

I asked Grok:

 

Briefly: "Therefore, can the regulatory risk aversion introduced by bank regulators, with risk weighted bank capital requirements, be said to have benefitted the PCMs, at the cost of the original growth generators? If yes, is that good for the economy long term?"

 

Grok answered:

 

"Yes, regulatory risk aversion through risk-weighted bank capital requirements can be seen as benefiting private capital markets (PCMs) by restricting bank loans to "riskier" small businesses and entrepreneurs—pushing them toward PCMs earlier, with less built-up value, and thus weaker negotiating positions. This comes at the expense of those original growth generators, who face higher hurdles to organic scaling.

 

Long-term, it's detrimental to the economy: It distorts credit toward "safe" assets (e.g., government bonds, mortgages), stifling innovation, reducing competition, weakening productivity growth, and heightening systemic risks from asset bubbles in over-favored sectors.”

 

I said: Thanks!

 

It replied: You're welcome! If you have more questions on banking regs or economics, I'm here.

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

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

It’s high time, decades late, for a small business or entrepreneur to sue bank regulators.

Below a letter to the editor that was ignored.

Favoring with regulations the access to credit of the “safe”, e.g., government debt and residential mortgages, over that of the “risky”, e.g., small entrepreneurs, de facto implies discriminating against the latter.

When will a small business or entrepreneur take the regulators to court for that? He could have artificial intelligence witnessing in his favour. 

With respect to the risk weighted bank capital requirements ChatGPT – OpenAI opined: “Risk weights can lead to discrimination against riskier borrowers because banks may be less inclined to lend to them or may charge higher interest rates to compensate for the higher capital costs.”

And for the society at large, that would not at all be a frivolous lawsuit.

Less inequality: “The function of credit 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.” John Kenneth Galbraith “Money: Whence it came where it went” 1975.

Free competition: small entrepreneurs, to gather the initial strength they need to later access capital markets, count on family, friends, and the credit from the small local bank around the corner.

The judge could opine these regulations have a greater purpose, namely to avoid a bank crisis: For that ChatGPT – OpenAI could again be called in as a witness and opine: "The most dangerous risks to the banking system revolve around what’s perceived as risky can be compared to the geocentric model of the universe.” - "The most dangerous risks to the banking system revolve around what’s perceived as safe, and can be compared to the heliocentric model of the universe… if risk is perceived as safe, it may lead to complacency and a failure to recognize potential risks, leading to dangerous consequences."

PS. Here are the sources for what I argued above.

http://subprimeregulations.blogspot.com/1997/06/puritanism-in-banking.html

http://subprimeregulations.blogspot.com/2023/11/ai-chatgpt-openai-are-bank-regulators.html

http://subprimeregulations.blogspot.com/2023/04/in-my-heliocentric-fight-against.html

#AI ChatGPT – OpenAI: Risk-weighted bank capital requirements, does that make it even harder for less creditworthy, to access the opportunities bank credit can provide?

I asked OpenAI:

"Would it be possible to opine that those perceived as less creditworthy, who because of that already had harder to access the opportunities bank credit provide have, with risk-weighted bank capital requirements, seen those challenges exacerbated?"

OpenAI answered: 

"Yes, it is possible to opine that risk-weighted bank capital requirements could exacerbate the challenges faced by individuals or entities perceived as less creditworthy in accessing bank credit. The following arguments support this perspective:

1. Reduced credit availability: Risk-weighted capital requirements may lead banks to allocate more capital for loans to less creditworthy borrowers, which could result in reduced credit availability. Banks may become more cautious in extending credit to these individuals or entities due to the higher capital requirements, resulting in limited access to the opportunities that bank credit provides.

2. Higher interest rates: When banks perceive borrowers as higher risk, they may charge higher interest rates to compensate for the potential losses associated with lending to them. Risk-weighted capital requirements can further contribute to this by increasing the cost of capital for banks. As a result, borrowers considered less creditworthy may face even higher interest rates, making it more challenging for them to afford credit.

3. Reinforcing creditworthiness perception: The link between risk-weighted capital requirements and creditworthiness perception is complex. However, the higher capital requirements for loans to less creditworthy borrowers might reinforce the perception that they are indeed riskier. This can create a self-reinforcing cycle, where limited access to credit due to perceived creditworthiness leads to higher capital requirements, which, in turn, restrict access to credit further.

It's important to note that these arguments present one perspective and do not capture the entire range of opinions or the intentions behind risk-weighted capital requirements. Regulators implement such requirements to promote financial stability and protect the banking system. The impact of these regulations on credit access and creditworthiness can vary depending on the specific context and implementation."

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

PS. Decreed Inequality

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

ChatGPT - OpenAI: Do risk weighted bank capital/equity requirements increase the inequality in the opportunity to access credit?

I asked OpenAI:

“If banks are allowed to hold less equity against loans to those considered more creditworthy, than against loans to those considered less creditworthy, does this increase the inequality in the access to the opportunity of bank credit?"

Open AI answered:

“Allowing banks to hold less equity against loans to borrowers with better credit ratings can indeed create an inequality in access to bank credit. This practice, known as risk-based pricing or risk-weighted assets, is commonly used in banking regulations and reflects the perceived risk associated with different borrowers.

When banks are allowed to hold less equity against loans to borrowers with better credit ratings, it means that these borrowers are considered less risky from the bank's perspective. As a result, they can obtain loans at lower interest rates and potentially access larger loan amounts. On the other hand, borrowers with lower credit ratings may face higher interest rates or be denied credit altogether due to the perception of higher risk.

This creates a disparity in access to bank credit, as individuals or businesses with better credit ratings have more favorable terms and conditions, while those with lower ratings may face higher costs or limited availability of credit. Consequently, this can contribute to increased economic inequality, as those who are already financially disadvantaged or have a less favorable credit history may find it more difficult to access affordable credit and improve their financial situation.

It is important to note that risk-based pricing is intended to align the cost of credit with the perceived risk, which can be justified from a risk management standpoint. However, if not carefully regulated, it can exacerbate existing inequalities in access to financial services.

To address this issue, regulators can implement policies to promote financial inclusion and ensure that individuals and businesses with lower credit ratings still have reasonable access to credit. This can involve providing support for credit building, financial education, and alternative lending options to underserved populations. Additionally, efforts to enhance credit reporting systems and encourage responsible lending practices can help mitigate the negative impact of risk-based pricing on inequality of access to bank credit."

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

Thanks OpenAI. I have for many years argued that, these risk weighted capital/equity requirements help those more creditworthy to also be more worthy of credit and those less creditworthy to also be less worthy of credit . Opportunity to Credit Inequality was decreed.

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

ChatGPT - OpenAI: As a small business, is my access to bank credit made harder by the risk weighted bank capital requirements?

I asked ChatGPT:

 

"If banks are required to hold much more equity against loans to small businesses than against Treasuries and residential mortgages, as a small business, is my access to bank credit made harder than it would be in the absence of such regulation?"

ChatGPT answered:

"Yes, if banks are required to hold more equity against loans to small businesses compared to other assets such as Treasuries and residential mortgages, it can potentially make your access to bank credit harder as a small business.

The regulation you mentioned is typically based on risk-weighted capital requirements, which are imposed by regulatory authorities to ensure the stability and safety of the banking system. These requirements aim to mitigate the risks associated with different types of assets held by banks.

When banks are required to hold more equity (capital) against loans to small businesses, it increases the risk-weighted capital requirement for such loans. As a result, banks may become more cautious and conservative when lending to small businesses, as it becomes relatively more expensive for them to hold the required capital against these loans. This could potentially lead to tighter lending standards, higher interest rates, or reduced credit availability for small businesses.

The intention behind these regulations is to protect the banking system from excessive risk-taking and to ensure that banks maintain adequate capital buffers to absorb potential losses. However, it can have unintended consequences, such as making it harder for small businesses to access bank credit, as banks may prioritize other assets with lower capital requirements.

It's important to note that the impact of these regulations can vary depending on various factors, including the specific regulatory framework in your country, the size and stability of the banking sector, and the overall economic conditions. Additionally, alternative sources of financing, such as non-bank lenders or government-backed loan programs, may exist to support small businesses in accessing credit."

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

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

The Federal Reserve’s largest credibility problem is that it lost its independence

Sir, I refer to your editorial “The Federal Reserve has a credibility problem” Washington Post December 16, 2022

All you write there is sure important and correct. But yet, sadly, real peccata minuta when compared to the Fed losing its independence.

Paul Volcker in his 2018 “Keeping at it” (page 148) explaining the risk weighted bank capital requirements, that which allow banks to leverage more or less their equity (their skin-in-the-game) writes (confesses): 

“The assets assigned the lowest risk, for which bank capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages… The American ‘overall leverage’ approach had a disadvantage as well in the eyes of shareholder and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities”

There with the “most political support”, the Fed clearly, if it ever had it, lost its independence.

What are American small businesses or entrepreneurs, those who because they are perceived as risky already get less credit and pay higher risk adjusted interest rates, to think of such regulatory subsidies handed out, in the Home of the Brave, to other “less-risky” access to bank credit competitors?

Volcker also states there: “Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011”

He is wrong, it's not “ironically” but just a natural consequence. All larger bank crises have always resulted from excessive bank exposures built-up with assets perceived as safe, never ever with what’s perceived as risky.

The Chavez/Maduro Bolivarian Revolution, has confessed its need of keeping the poor poor

Though in Spanish, below is a short YouTube in which three important members of the Chavez/Maduro Bolivarian Revolution, confess their need of keeping the poor poor:

Tareck El Aissami, former Vice President and current Minister of Industries and National Production: “The poorer people are, the more loyal to the revolutionary project they are, and the more love for Chávez they have"

Héctor Rodríguez, a former Minister of Education and currently the Governor of Miranda: "It is not that we are going to lift people out of poverty into the middle class so that they later aspire to be scrawny (a derogatory term used for the opposition)"

Jorge Giordani, four times Minister of Planning, “Our political strength is given to us by the poor, they are the one who votes for us and that’s why our discourse of defending the poor. The poor will have to remain poor; we need them so.” 

https://youtu.be/mrsqfg00m_g

PS. So that the riskier small businesses and entrepreneurs who need credit, will need us more, and therefore vote for us more, we, the regulators of the Bureaucracy Autocracy, must set the risk weighted bank capital requirements especially high on loans to them.

Trade wars will mean new tariffs

There is another tariff war that is being dangerously ignored. 

The July 6 editorial "A splendid little tariff war?" rightly held that "tariffs create all sort of inefficiencies, unintended consequences and uncertainty."

The risk-weighted capital requirements for banks also translate de facto into subsidies and tariffs, which have resulted in a too much-ignored allocation of bank credit war. 

One consequence is that those perceived as risky, such as entrepreneurs, have their access to bank credit made more difficult than usual, and our economy suffers. Another is that by promoting excessive exposures to what is especially dangerous, because it is perceived as safe, against especially little capital, guarantees that when a bank crisis results, it will be especially bad. 

In terms of Mark Twain's supposed saying, these regulations have bankers lending out the umbrella faster than usual when the sun shines and wanting it back faster than usual when it looks like it is going to rain.

PS. The risk weights used by bank regulators, have these been approved by US Congress in accordance to the Constitution?

Here, on this issue, an October 2024 dialogue with ChatGPT.

Letter published in the Washington Post

A 2019 letter on this issue to the Executive Directors and Staff of the International Monetary Fund.

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

 

Current risk weighted capital requirements are de facto regressive regulatory taxes imposed on the access to bank credit.

When interviewed by Dave Rubin, Don Boudreaux, defending a flat tax states:

“When you tax all income earning activities the same, then the relative prices of different types of labor services stay the same. With progressive taxes you create greater distortion in the economy and that makes us all a bit less wealthy than we would otherwise be”

Why is never a flat capital requirement for banks defended with the same impetus as a flat tax on income?

As is the risk weighted capital requirements for banks, which even though some leverage ratio has been imposed still operate on the margin, impose de facto different taxes on the access to bank credit.

To make it worse though in the case of taxes on income these are currently progressive, in the sense that they most affect those who are already by being perceived as risky have less and more expensive access to bank credit, these regulatory taxes are regressive.

PS. Why did Classical Liberals or Libertarians not speak up when, in 1988, with the Basel Accord, Basel I, the regulators risk weighted the sovereign with 0% and the citizens with 100%?

When it comes to discrimination, EU cares more about the access to a monastery than about the access to bank credit

If I had the right to vote I would have voted for Britain to stay in EU. But I would have hoped for that this option had won by just one vote, so that there was huge pressure on EU to clean up its act. It sorely needs it.

For instance, the European Commissioner for Internal Market and Services is in charge of promoting free movement of capital and therefore has a lot do to with the extremely important area of regulating the financial services. 

It is a topic of much interest for me since, for more than a decade, I have argued that the Basel Committee’s risk weighted capital requirements for banks, is impeding the free movement of capital with disastrous consequences for the real economy.

But in 2012, during a conference in Washington by the then Commissioner Michel Barnier, I was handed a brochure that presented, as a success story of his office, the following: 

“A French citizen complained about discriminatory entry fees for tourists to Romanian monasteries. The ticket price for non-Romanians was twice as high as that for Romanian citizens. As this policy was contrary to EU principles, the Romanian SOLVIT centre persuaded the church authorities to establish non-discriminatory entry fees for the monasteries. Solved within 9 weeks."

And then I knew for sure something smelled very rotten in the EU, with its full of hubris besserwisser not accountable to anyone technocrats.

How can they waste time on such small time discrimination when those borrowers ex ante perceived as risky, and who therefore already got less bank credit and at higher interest rates, now suffer additional discrimination caused by regulators requiring banks sot hold more capital when lending to them that when lending to those ex ante perceived as safe? And on top of it all, for absolutely no reason, since dangerous excessive bank exposures, are always built up with assets perceived as safe.

Barnier, as Frenchman should know Voltaire’s “May God defend me from my friends: I can defend myself from my enemies.” But now bank regulators tell banks “trust much more your friends”, the AAA rated, and to which in Basel II they assigned a risk weight of 20%; and “beware even more of your enemies”, the below BB- rated, and which were given a risk weight of 150%.

As a result banks can leverage more their equity with “safe” assets than with “risky” assets, and so they now earn higher risk adjusted returns on equity when lending to sovereigns, members of the AAArisktocracy or financing houses, than when lending to SMEs and entrepreneurs.

And as a direct consequence of this regulatory risk aversion, banks do not any longer finance the riskier future, they only refinance the for the short time being safer past.

So there is no wonder EU is not doing well. And if Brexit helps to push for the reform that are needed, then Britain should be given an open invitation to return to it at its leisure.

PS. During the Washington conference I just could not refrain from asking what the French citizen did for 9 weeks while waiting for SOLVIT to come to his rescue.

PS. Lubomir Zaoralek the minister of foreign affairs of the Czech Republic in FT “Europe’s institutions must share the blame forBrexit” July 1. Hear hear!

The poor, “the risky” and the future are subsidizing the bank borrowings of “the absolutely safe”. Now how about that?

Governments guarantees to help bank creditors if banks fail, which in all essence is a support subsidy to the banks.

And, if banks fail, and government needs to pay up, it is argued that it is the taxpayers who must pay… and we usually leave it at that. 

But, when taxpayers pay, it is actually all who pay, and that means, in relative terms, especially the poor; because the wealthy have more deposits in the banks which are saved; and because the poor would probably be the one most to benefit with the taxes that could be collected, if the support subsidy was not needed to be paid.

But regulators also allow banks to hold less equity when lending to those from a credit point of view perceived as absolutely safe, than when lending to those perceived as risky; and that signifies that the support subsidy is effectively bigger for those perceived as absolutely safe than for those perceived as risky.

Finally, what has already made it, namely the history, has a lot more possibilities of being perceived as absolutely safe, than what needs an opportunity to be, namely the future.

All that translates into that the poor, those perceived as "risky" and the future, are subsidizing the bank borrowings of the “absolutely safe”… now how about that? And, if that is not a cruel way of fostering inequality, what is?

What are the thickheaded bank regulators smoking?

It is truly mindboggling to hear so much about job creation, without a single word uttered against how bank regulators discriminate against our prime job creators, the small businesses and entrepreneurs… only on account of these being perceived as “risky”.

What are they smoking... might they be talking about jobs on Mars?

Our current bank regulators seem incapable of understanding that when they allow the banks the goody of being able to leverage their capital more if lending to the “not-risky” than when lending to the “risky”, they are effectively discriminating against the “risky” small businesses and entrepreneurs, precisely those we most need to get into action in order to create the next generation of jobs. 

Honestly, how thickheaded can we allow them to be?