#AI ChatGPT: Risk weighted bank capital requirements with decreed weights of 0% government – 100% citizens is it anathema to neoliberalism?

I asked ChatGPT:

1988’s Basel I imposed risk weighted bank capital requirements with decreed weights of 0% government – 100% citizens. Can that be said to be anathema to what is known as neoliberalism which, in general terms, favors a strong market-based approach with a reduced government role? 

ChatGPT answered:

"Basel I, implemented in 1988, was primarily focused on establishing minimum capital requirements for banks to ensure their stability and resilience. While it did assign risk weights to different types of assets, including government and citizen exposures, it did not explicitly prescribe a specific ideology or political philosophy such as neoliberalism.

Neoliberalism is a broad term used to describe a political and economic philosophy that emphasizes free markets, limited government intervention, privatization, and deregulation. It advocates for reducing government involvement in the economy and promoting market-driven approaches.

In the context of Basel I, the risk weights assigned to government exposures and citizen exposures were intended to reflect the perceived riskiness of those assets. The 0% risk weight for government exposure was based on the assumption that investments in government securities were inherently risk-free. On the other hand, the 100% risk weight for citizen exposures indicated that such exposures were considered to carry the highest level of risk.

While the risk weights assigned under Basel I may appear to favor government exposures over citizen exposures, it is important to note that the framework aimed to establish a standardized approach to risk assessment and capital adequacy across international banks. The intent was to ensure banks held sufficient capital to withstand losses, regardless of the specific assets they held. It did not necessarily reflect an ideological bias towards government or citizens.

It is worth mentioning that subsequent Basel frameworks, such as Basel II and Basel III, introduced more sophisticated risk-based approaches that aimed to capture a broader range of risks, including credit, market, and operational risks. These frameworks incorporated more nuanced risk weights, which were not strictly binary (0% or 100%), and considered a variety of factors when assessing capital requirements.

In summary, while the risk weights assigned under Basel I may not align perfectly with the tenets of neoliberalism, it is important to view the framework in the context of its primary objectives: ensuring bank stability and capital adequacy. The subsequent Basel frameworks have further evolved to incorporate a more comprehensive and risk-sensitive approach."

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

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

PS. http://subprimeregulations.blogspot.com/2015/07/just-before-fall-of-berlin-wall.html

Basel I, II, and III are all examples of pure unabridged regulatory statism

In July 1988 the G10 approved the Basel Accord. For its risk weighted bank capital requirements it assigned the following risk weights:

0% to claims on central governments and central banks denominated in national currency and funded in that currency. 

100% to claims on the private sector.

That means banks can leverage much more whatever net margin a sovereign borrower offers than what it can leverage loans like to entrepreneurs. That means banks will find it easier to earn high risk adjusted returns on their equity lending to the sovereign than for instance when lending to entrepreneurs. That means it will lend too much at too low rates to the sovereign and too little at too high rates to entrepreneurs.

In other words Basel I introduced pure and unabridged statism into our bank regulations. 

Basel II of June 2004 in its Standardized Risk Weight, for the same credit ratings, also set lower risk weights for claims on sovereigns than for claims on corporates.

In a letter published by FT November 2004 I asked: “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

And the European Commission, I do not know when, to top it up, assigned a Sovereign Debt Privilege of a 0% risk weight to all Eurozone sovereigns, even when these de facto do not take on debt in a national printable currency.

And, to top it up, the ECB launched its Quantitative Easing programs, QEs, purchasing European sovereign debts.

At the end of the day, the difference between the interest rates on sovereign debt that would exist in the absence of regulatory subsidies and central bank purchases, and the current ultra low or even negative rates, is just a non-transparent tax, paid by those who save. Financial communism

And all this began one year before the fall of the Berlin Wall

My Fourth of July 2019’s tweets to the United States of America

This Fourth of July 2019, here below, are three tweets in which, to the United States of America that I admire and am so grateful to, I express my very heartfelt concerns.

In 1988 America signed on to the Basel Accord’s risk weighted capital requirements for banks. 

These gave banks huge incentives to finance what was perceived as safe, and to stay away from the “risky”. 

It is so contrary to a Home of the Brave opening opportunities for all.

And bank regulators decreed risk weights: 0% sovereign, 100% citizens

That implies bureaucrats know better what to do with credit than entrepreneurs

That has nothing to do with the Land of the Free, much more with a Vladimir Putin’s crony statist Russia

America, where do you think you would be if you had welcomed all your immigrants with risk weighted bank capital requirements?

PS. “grateful to”? Had my father, a polish soldier not been rescued by American’s from a German concentration camp April 1945, I would not be.

PS. As one of those millions Venezuelan in exile, I know my country’s future much depends on America’s will to support its freedom.

When government bureaucrats are favored more than entrepreneurs in the access to bank credit, the game is soon over

In 1988, with Basel I, out of some Pandora box, for the purpose of setting the capital requirements for banks,the  regulators came up with a risk weight of 0% for sovereigns and of 100% for citizens. As a result banks need to hold much less equity when lending to sovereigns than when lending to citizens.

That 0% risk weight was premised on that sovereigns were in possession of the money-printing machines and could therefore always repay. I am sure the Medici’s would have shivered hearing such a generous risk assessment.

So, since then, banks have been allowed to leverage much more with loans to sovereigns than with loans to citizens; and therefore obtain much higher risk adjusted returns on equity when lending to sovereigns than when for instance lending to entrepreneurs. 

That de facto implies believing in that a government bureaucrat can use bank credit that he himself has not to repay, better than an entrepreneur.

That alone should suffice to make clear how loony and statist the current bank regulations are.

But the world keeps mum on this. As I see it this is a regulatory crime against humanity that should be punishable.

Here is a more extensive explanation of the mistakes of risk weighted capital requirements for banks.

Have the risk weights used in current bank regulations really been approved by the US Congress, in accordance to the Constitution?

Note: When reading about “bank capital requirements”, know that you are reading about “bank equity requirements” or about “bank shareholders’ skin-in-the game requirements”

The confession that shall not be heard

“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

New foreword, January 2021: For about 600 years banks allocated credit based on risk adjusted interest rates. After risk weighted capital requirements were introduced, 1988 Basel I, they began allocating it based on risk adjusted returns on equity.

Lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs

Lower bank capital requirements for banks when financing the central government than when financing local governments, de facto implies federal bureaucrats know much better what to do with credit than local bureaucrats.

Lower bank capital requirements for banks when financing residential mortgages, de facto implies that those buying a house are more important for the economy than, e.g. small businesses and entrepreneurs.

Lower bank capital requirements for banks when financing the “safer” present than when financing the “riskier” future, de facto implies placing a reverse mortgage on the current economy and giving up on our grandchildren’s future.

Those bank capital requirements, de facto ruled that those less creditworthy were even less worthy of credit, and that those more creditworthy were even more worthy of credit.

Can this really be in accordance with the U.S. Constitution? Is it not a Shadow-Insurrection?

Original post May 2013:

As a Venezuelan I regretfully know much too much about the violations of a Constitution, but I cannot say that I know much about the Constitution of the United States.

For instance, the Constitution of the United States of America, in Section 8 states, “The Congress shall have the power to…fix the Standard of Weights and Measures.”

And I know that bank regulators, by setting risk weights determine how much capital (equity) banks need to hold against different assets... which means that banks will be able to obtain different risk adjusted returns on equity for different assets.

And so I ask, did the United States Congress really approve those risk weights? I say this because I find that concept to be anathema to “The Home of the Brave”.

And I also ask because the US Constitution, in its section 9 states: “No Title of Nobility shall be granted by the United States”… and that seems precisely what the US might have allowed by allowing regulatory preferences, much lower risk weights, on loans to the Sovereign (the Monarch) and to an AAAristocracy... or more precisely an AAArisktocracy.

And clearer yet the Constitution, in Section.8. states: "The Congress shall have the power to borrow Money on the credit of the United States". I am absolutely sure the Founding Fathers did not mean that United States’ Treasury should have the power to borrow money based on bank regulation favors.

And what are those risk weights? The sovereign, meaning the Federal Government, meaning bureaucrats/politicians deciding on the use of bank credit, were assigned a 0% weight, the “AAArisktocracy” one of 20%, and We The People, we were sentenced to have a 100% risk weight.

But what do these risk weights really signify? The answer is quite straightforward. Those with low risk weights will have even more access at even easier terms to bank credit, than what the natural order of banking would give them. And so those with higher risk weights will, consequentially, have less even access to bank credit and have to pay even more for it, than what the natural order of banking would give them.

And so, in words of Mark Twain, this means that bankers are even much more prone than usual to lend out the umbrella when the sun shines, and to take it back when it rains.

And the tragic consequences for the US are many:

It increases the inequality gap between The Infallible and the Risky

It stops bank from financing the future and make them mostly refinance the past.

And in the case of the sovereign, it translates into an effective subsidy of the interest rates paid by the Government, and so everyone is flying blind, not knowing what the real not subsidized risk free rate would be.

And at the end of the day this piece of regulation guarantee excessive bank exposures to what’s ex ante perceived, decreed or concocted as safe, but which might turn out risky, and when that happens are held against especially little capital, and so will result in especially severe bank crises.

And the list goes on...

For a starter: Shall the credit of the USA be helped by the Fed with its Quantitative Easing (QEs)?

“Paraphrasing someone; regulation of the financial system is too important to be left in the hands of regulators and bankers”

PS. The risk-weighted capital requirements for banks are, de facto, tariffs on the allocation of bank credit.

PS. Financial Communism

PS. And it was introduced one year before the fall of the Berlin Wall

PS. It empowered a Bureaucracy Autocracy

PS. And the Academia’s silence on this, makes it a complicit.

PS. I enrolled ChatGPT OpenAI to assist me on this issue.

Do the risk weighted bank capital/equity requirements constitute, de facto, a tax?

Here AI’s ChatGPT and Grok on what the Founding Fathers would have opined.

PS. I'm not an American, do not even intend to be, so why do I care about all this?

If it had not been for America I would not exist.

I come from a nation cursed by centralized oil revenues so, naturally, I despair when I see regulators giving governments preferential access to bank credit.