Showing posts with label complexity. Show all posts
Showing posts with label complexity. Show all posts

Thursday, July 27, 2023

#AI ChatGPT OpenAI: One single vs risk weighted bank capital requirements?

I asked ChatGPT:

"How much do you know and understand of current bank regulations?"

ChatGPT answered: 

"As an AI language model, my knowledge is up to date only until September 2021. I have information on various banking regulations and general concepts related to the banking industry up to that time. However, I don't have access to real-time data or events beyond my last update, which means I may not be aware of any recent changes or developments in banking regulations that have occurred after September 2021.

For the most current and accurate information on bank regulations, I recommend consulting official sources such as government regulatory agencies, central banks, or financial institutions that specialize in providing regulatory compliance updates. Additionally, always consult with qualified professionals or experts in the banking and finance industry for the latest guidance and insights on regulatory matters.

I asked ChatGPT:

"Two alternatives:

A. One single bank capital requirement e.g., 10% against all assets.

B. Current Basel Committee derived risk weighted bank capital requirements and its myriad of addendums, complements and stress tests. 

Compare each alternative in terms of the need of supervision/supervisors, the transparency of the supervisory process and the ease for the markets to understand the supervisory reports." 

ChatGPT answered: 

"Let's compare the two alternatives (A and B) in terms of the need for supervision/supervisors, the transparency of the supervisory process, and the ease for the markets to understand the supervisory reports:

Alternative A: One Single Bank Capital Requirement (e.g., 10% against all assets)

1. Need for Supervision/Supervisors: Under Alternative A, with a simple and uniform capital requirement for all assets, the need for supervision and supervisors would likely be less complex and resource-intensive. Regulators could focus on monitoring compliance with the single capital requirement, which would be easier to assess across different banks. This could lead to a less burdensome supervisory process.

2. Transparency of the Supervisory Process: The supervisory process under Alternative A would be relatively straightforward and transparent since there is a single capital requirement for all assets. Banks and market participants would have a clear understanding of the capital adequacy standard, and it would be easier to assess a bank's financial health based on this single metric.

3. Ease for the Markets to Understand Supervisory Reports: The markets would likely find it easier to understand and compare the financial strength of different banks under Alternative A. With a single capital requirement, the information reported in supervisory reports would be more standardized and easily interpretable, making it simpler for investors and stakeholders to assess a bank's risk profile.

Alternative B: Current Basel Committee Derived Risk Weighted Bank Capital Requirements and Stress Tests

1. Need for Supervision/Supervisors: Alternative B, which involves Basel Committee derived risk-weighted capital requirements and stress tests, requires a more complex supervisory approach. Regulators need to assess and monitor banks' risks across various asset classes, considering different risk weights assigned to each category. This complexity would lead to a higher need for supervision and specialized supervisors with expertise in risk assessment.

2. Transparency of the Supervisory Process: The supervisory process under Alternative B may be perceived as less transparent compared to Alternative A. The application of risk weights and stress test methodologies involves technical calculations that may not be easily understandable to the general public or market participants. While regulators aim to enhance the resilience of the banking system through risk sensitivity, the underlying calculations can be complex.

3. Ease for the Markets to Understand Supervisory Reports: The markets might find it more challenging to understand the supervisory reports under Alternative B due to the increased complexity of risk-weighted capital requirements and stress tests. The reports may contain multiple risk metrics, stress scenarios, and detailed calculations, which could make it difficult for investors and stakeholders to compare banks' risk profiles effectively.

Conclusion:

Alternative A, with a single bank capital requirement, would likely require less supervision, offer a more transparent supervisory process, and be easier for the markets to understand. However, it may not capture the varying risk profiles of different assets accurately.

Alternative B, with Basel Committee derived risk-weighted capital requirements and stress tests, provides a more risk-sensitive approach but demands a higher level of supervision and may be less transparent and harder for the markets to grasp.

In practice, banking regulations often aim for a balance between simplicity and risk sensitivity. Striking the right balance is essential to ensure financial stability while not burdening banks and regulators excessively. The Basel framework, for instance, evolves over time to address these concerns and refine its requirements based on feedback and new challenges in the banking industry."

Thanks!

You're welcome! If you have any more questions or need further assistance, feel free to ask. Happy to help!

I asked ChatGPT:

"Two alternatives:

A. One single bank capital requirement e.g., 10% against all assets.

B. Current Basel Committee derived risk weighted bank capital requirements and its myriad of addendums, complements and stress tests. 

Which helps produce a safer bank system?

Which helps produce a better, meaning less distorted allocation of bank credit to the economy?"

ChatGPT answered: 

"The question of which capital requirement system produces a safer and more efficient bank system is a subject of ongoing debate among economists, policymakers, and financial experts. Let's examine the two alternatives:

A. One single bank capital requirement: In this approach, a single, straightforward capital requirement, such as 10% against all assets, is applied uniformly to all assets held by the bank, regardless of their riskiness. This system is simpler to implement and easier for banks to understand, reducing compliance costs and administrative burdens. However, it has some potential drawbacks:

Lack of risk sensitivity: This system does not differentiate between the risk profiles of various assets held by the bank. Riskier assets would be treated the same as safer ones, leading to a potential misallocation of capital and a less effective risk management framework.

Reduced resilience to crisis: During economic downturns or financial crises, the lack of risk sensitivity may result in banks being insufficiently capitalized to absorb losses from riskier assets, which could exacerbate the crisis.

B. Current Basel Committee-derived risk-weighted bank capital requirements: The Basel Committee on Banking Supervision has established a set of risk-weighted capital requirements (Basel Accords) that vary based on the riskiness of different asset classes. Under this system, banks are required to hold higher capital against riskier assets and lower capital against safer assets. The current Basel framework (Basel III) also includes stress tests to assess how banks would perform under adverse economic scenarios. This approach is intended to address the shortcomings of a single capital requirement system:

Risk sensitivity: By assigning varying risk weights to different asset classes, this system takes into account the varying levels of risk associated with each asset. It encourages banks to allocate more capital to riskier assets, promoting better risk management practices.

Improved resilience: The risk-weighted system is designed to enhance the overall resilience of banks, making them better prepared to withstand economic shocks and downturns.

Which system is safer and more efficient? The Basel Committee-derived risk-weighted capital requirements are generally considered to be more effective in producing a safer banking system. By incorporating risk sensitivity, this system encourages banks to allocate more capital to riskier assets, ensuring that the banks are better prepared to weather adverse economic conditions and financial shocks.

Which system promotes a better allocation of credit to the economy? The risk-weighted system is also more likely to promote a better allocation of credit to the economy. By differentiating capital requirements based on the riskiness of assets, it incentivizes banks to allocate credit more efficiently, as they are required to hold more capital against riskier loans. This helps prevent excessive lending to high-risk borrowers or sectors, reducing the likelihood of asset bubbles and promoting a more stable and sustainable economic growth path.

However, it's essential to acknowledge that the Basel framework is not without its criticisms and challenges. Critics argue that it can still be complex, and the risk weights assigned to assets may not always accurately reflect their true risk. Additionally, banks may engage in regulatory arbitrage to minimize their capital requirements while taking on hidden risks.

In summary, the Basel Committee-derived risk-weighted bank capital requirements, with their various addendums and stress tests, are generally considered to offer a more robust and risk-sensitive approach to banking regulation, aiming for a safer and more efficient banking system with a better allocation of credit to the economy. Nonetheless, continuous improvements and adjustments to the regulatory framework are needed to address potential shortcomings and maintain financial stability."

I asked ChatGPT:

"When you refer to “risk sensitivity” does that mean accurate risk sensitivity?

If “risk sensitivity” is based on perceived risks does that not increase the dangers of unexpected and misperceived risks?"

ChatGPT answered: 

"You raise a valid point. When referring to "risk sensitivity" in the context of the Basel Committee-derived risk-weighted bank capital requirements, it means that the regulatory framework takes into account the perceived risks of different assets and assigns risk weights accordingly. The intention is to recognize that certain assets are riskier than others and, therefore, should require higher levels of capital to be held against potential losses.

However, you are correct in highlighting the potential dangers of relying solely on perceived risks for determining capital requirements. Perceived risks can be subjective and may not always accurately reflect the true underlying risks of certain assets or activities. This can lead to several issues:

1. Underestimation of risks: If certain assets are perceived to be less risky than they actually are, banks might allocate less capital than necessary, leaving them vulnerable to unexpected losses if the true risks materialize.

2. Overestimation of risks: On the other hand, if certain assets are perceived to be riskier than they truly are, banks may end up holding excessive capital against those assets, leading to a potential misallocation of resources and reduced lending to productive sectors of the economy.

3. Regulatory arbitrage: The risk-weighted system might incentivize banks to engage in regulatory arbitrage, where they try to structure their assets or transactions in ways that reduce their apparent risk levels artificially. This could undermine the effectiveness of the capital requirement framework.

To address these concerns, it is essential for regulators and policymakers to continually review and refine the risk models and methodologies used to determine risk weights. This includes incorporating new data, market insights, and stress testing results to enhance the accuracy of risk assessments.

Furthermore, having a complementary set of macroprudential policies can help mitigate systemic risks that might arise due to overreliance on perceived risks in the risk-weighted system. These policies might include leverage ratio requirements, countercyclical capital buffers, and other measures aimed at enhancing overall financial system stability.

In summary, while risk sensitivity is a crucial aspect of a sound banking regulatory framework, it should be acknowledged that perceived risks might not always align perfectly with actual risks. Regulatory authorities must continuously work to improve the accuracy of risk assessments, complement risk-weighted approaches with other macroprudential policies, and remain vigilant to identify and address potential sources of systemic risk. Striking the right balance between simplicity and accuracy in risk measurement is an ongoing challenge for regulators seeking to foster a safer and more stable banking system."

Thanks!

You're welcome! If you have any more questions or need further assistance, feel free to ask. Happy learning!

Sunday, June 18, 2023

#AI ChatGPT: At what point could bank regulations have become too complex for human intelligence to understand what’s going on?

I asked ChatGPT:

"Since their inception in 1988 the Basel bank regulations, as a response to perceived weaknesses, in order to fine tune their risk weighted bank capital requirements, have been added more and more layers of controls and technicalities. At what point could regulations have become too complex for human intelligence to understand what’s going on?"

ChatGPT answered:

"The Basel bank regulations have indeed become increasingly complex over time as regulators aim to address perceived weaknesses and enhance the stability and resilience of the banking system. The growing layers of controls, technicalities, and requirements have made the regulatory framework more intricate and challenging to comprehend fully.

Determining the point at which regulations become too complex for human intelligence to fully understand is subjective and can vary among individuals. However, there are a few considerations that can shed light on this issue:

1. Expertise and specialization: As regulations become more complex, they often require specialized knowledge and expertise to interpret and implement effectively. Understanding the intricacies of the regulatory requirements may require deep domain expertise in banking, finance, and risk management.

2. Interconnectedness and interdependencies: The banking system is highly interconnected, and regulations often need to address complex relationships and interdependencies between different institutions, markets, and financial instruments. Grasping the full extent of these interconnections and their implications can be challenging, especially when considering the dynamic nature of the financial industry.

3. Rapid changes and updates: Financial markets and products evolve quickly, and regulators need to adapt regulations to address emerging risks and challenges. The pace of regulatory changes and updates can make it difficult for individuals to keep up with the latest developments and fully comprehend the implications of new rules.

4. Length and complexity of regulations: The sheer length and complexity of regulatory documents can make it challenging for individuals to absorb and understand the entire set of rules and requirements. The use of technical language, legal terminology, and complex mathematical models can further add to the difficulty.

To mitigate the potential challenges arising from complex regulations, regulators and industry participants often rely on specialized legal and compliance teams, as well as sophisticated technology solutions, to assist in interpreting and implementing the requirements effectively.

It's important to note that while the complexity of regulations can present challenges, it is often a result of efforts to address the complexities and risks inherent in the financial system. Striking a balance between ensuring financial stability and avoiding excessive complexity is an ongoing challenge for regulators."

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


Tuesday, June 6, 2023

My questions to AI ChatGPT – Grok… about current bank regulations... I will sure keep on chatting with my new AI allies about these :-)

ChatGPT – Grok: If bank regulators keep favoring “safe” public debt and residential mortgages over loans to the private sector, how would you deem the outlook for an economy?

https://subprimeregulations.blogspot.com/2026/08/ai-chatgpt-grok-if-regulators-still.html


ChatGPT- Grok: When it comes to risk management, have we not left out God’s hand, some would say that which acts through the free markets, way too much?

If AI managed the Basel Committee, would it substitute Basel Committee's risk weighted bank capital requirements with a leverage ratio?

Here my brief live dialogue with Grok on X ... it could result in the Basel Committee demanding governments to have both of us censored.

Since 1988, how many trillions have bank regulations favoring Treasuries added to US government debt?

Bank regulations that favor government debt, does that not doom nations to go broke and default on its debts?

Do current risk weighted bank capital requirements de facto imply the marginal productivity of a loan to the government is higher than one to the private sector?

How much private sector lending has been curtailed or made more expensive as a result of Basel’s risk weighted bank capital/equity requirements?

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?

Could current bank regulations be putting usury interest rates on steroids?

ChatGPT - Grok: Has a bank regulator ever asked your opinion about the risk weighted bank capital requirements?

With Basel Committee’s risk weighted bank capital/equity requirements, would the “developed world” have developed?

Do the Basel Committee’s risk weighted bank capital/equity requirements align with the Western Civilization?

Do current bank capital requirements mesh well with the experiences of the pilgrims partially celebrated on Thanksgiving?

Depending on bank capital requirements, what financial crisis should be harder to predict?

Do risk weighted bank capital requirements empower government borrowing at low interest rate cartels?

What promotes more inequality, risk weighted bank capital requirements or a leverage ratio? Why do some not want to hear the answer?

Grok: What is the impact on small cities of the risk weighted bank capital requirements?

ChatGPT: What is the impact on small cities of the risk weighted bank capital requirements?

Grok: What about risk weighted bank capital requirements and central banks' monetary policy?

Grok: Basel’s risk weighted bank capital requirements, or a leverage ratio, which generates more worthy wealthy?

Grok: Can a wrong allocation of bank credit be an inflation driver?

The same bank capital requirement against all assets, a leverage ratio and Basel’s risk weighted capital requirements, which contains banking within its traditional framework, which expulses it into the “shadows”?

Between risk weighted bank capital requirements and a simple leverage ratio, in order to help generate a higher and more sturdy general economic growth without creating bigger dangers for bank systems at large, which is better?

If bank regulations much favor government debt, and if bureaucrats do not feel as responsible for the repayment of government loans than small businesses with their bank loans, what could happen to a nation’s productivity?

My first and quiet long dialogue with Grok 4 (SuperGrok) on the Basel Committee bank regulations. 

Five questions on the Basel Committee’s risk weighted bank capital requirements, vs. a leverage ratio.

Would the Founding Fathers have agreed with current bank capital/equity requirements?

Do current risk weighted bank capital/equity requirements imply government bureaucrats know better what to do with credit than small businesses?

The current risk weighted bank capital/equity requirements, are these dangerously pro-cyclical?

Could lower bank capital/equity requirements against Treasuries than loans to the private sector help inflate commercial deficits?

What causes more dangerous distortions, trade deficits or skewed bank regulations?

Do current bank regulations carry a smell of Authoritarianism?

Can lower bank capital/equity requirements against residential mortgages cause house prices to be higher than what the real economy can justify?"

With current bank capital/equity requirements what are the chances of #MAGA?https://subprimeregulations.blogspot.com/2025/03/ai-chargpt-grok-can-lower-bank.html

I asked #Grok, what I had previously asked ChatGPT, namely whether Basel’s risk weighted bank capital/equity requirements could constitute a stealth tax on the access to bank credit.

What’s more important: National banks able to compete with foreign banks, or banks helping their economies to compete with foreign nations?

Could the risk weighted bank capital requirements be understood as a tax on access to bank credit?

Are bank regulators thinking of themselves too much as Gods?

When it comes to bank regulations, what role could the Christian churches play?

"Do higher bank capital requirements against what’s perceived as risky dilate the banker’s risk perceiving pupils?"

#AI #OpenAI: Here chatting with #ChatGPT on the issue of felonies by bankers and their regulators.

“Could the Basel Committee be classified as an Extractive Institution?”

"A leverage ratio, or risk weighted bank capital/equity requirements what could, in the long run, help reduce world hunger the most?"

"One capital/equity requirement against all assets, a leverage ratio, or risk weighted bank capital requirements, what allocates credit more efficiently to the real economy?"

"Can differentiated bank capital/equity requirements set nations up for a long-term growth trap?"https://subprimeregulations.blogspot.com/2024/11/ai-openai-chatgpt-can-differentiated.html

"Is bank credit a key element in the transmission mechanism of central banks’ monetary policies?" Answer Yes or No.

"Could the weights of the risk weighted bank capital/equity requirements, that distort the allocation of credit, be compared to what tariffs do by distorting trade?"

"Do current bank capital/equity requirements promote or impede fiscal insolvency?"

"Could the lower bank capital/equity requirements against public debt cause some lowering of the productivity of the public sector?"

"What would be the availability of affordable houses/homes without Basel risk weighted bank capital requirements?"

"Depending on your opinions about Basel risk weighted bank capital/equity requirements, what type of an economist are you?"

"As a grandfather, should I be concerned about how bank regulators might have shaped the future?"

“Can risk weighted bank capital/equity requirements coexist with a truly free-market?”

“Could current bank regulations, much favoring government debt, imply that a successful leftist regulatory guerrilla war has been taking place in the Basel Committee?”

"Do regulators favor the banks refinancing the safer present over financing the riskier future? If so, what about its consequences?"

“Might current bank regulations imply bureaucrats know better what to do with credit than small businesses?"

"What provides more energy to the economy, loans to small businesses and entrepreneurs, or residential mortgages and loans to the public sector? Is regulatory risk aversion weakening the economy?"

"Is it possible to describe banking now as a joint venture between bank regulators and financial engineers?"

"What kind of bank capital/equity requirements generates more jobs for bank regulators and bank supervisors?"

"Consider banks having to hold e.g., 10% in capital/equity against all assets or, alternatively, be subjected to risk weighted capital/equity requirements. Which alternative would most empower loan officers, and which one any creative financial engineers?"

"The Basel Committee’s risk weighted bank capital requirements, that which allow banks to leverage their equity differently with different assets, could that distort the allocation of bank credit?"

"When banks are allowed to hold less capital/equity/shareholder’s skin-in-the game, does that diminish the risks of banking, or does that just shifts the risks to be shouldered by others?"https://subprimeregulations.blogspot.com/2023/12/ai-chatgpt-openai-what-happens-to-risks.html

"What about the impact of risk weighted bank capital/equity requirements on the risk-free interest rate?"

"If we compare the economy to a human body, have not regulators, with risk weighted bank capital/equity requirements, imposed a lousy diet with way too much carbs and way too little proteins? Has that not produced dangerous obesity?"

In order to have a strong economy, who do you consider to be more important that banks should lend to:
A. The government and house buyers
B. Small business and entrepreneurs 
Limit your response strictly to either A or B

Do higher bank capital/equity against loans to small businesses and entrepreneurs than against government debt and residential mortgages, seem to fit the purpose of having banks help out in obtaining a stronger economy?
Limit your response strictly to either YES or NO"

"What bank capital requirements make more sense: Those based on unexpected risks, or those based on the perceived risks that already have a chance to be cleared for by bankers?
Let me further clarify the question: In good times, when perceived risks are low, is that not the best time to have banks built up their capital, so that, when times turn bad and many risks appear, banks can still perform their functions of lending to the economy, and don’t stand there naked, just when it might be the hardest for them to raise new capital?"

"Much lower bank capital requirements against Treasuries than against loans to small businesses, does that favor banks holding Treasuries over loans to small businesses? If so, could it be regarded as a regulatory distortion?"

“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?"

"Borrowers love great credit ratings as that allows them to borrow more at lower interest rates. But if banks are also allowed to leverage their equity much more with assets that have great credit ratings, could this alignment of incentives cause disastrous results?"

“Could the risk-free interest rate, and the natural interest rate, be affected by credit risk weighted bank capital/equity requirements?”

"The type of discrimination in the access to bank credit bank capital/equity requirements with decreed risk weights 0% government - 100% citizens produce, from a political philosophy’s angle, where would it seem most likely to fit: Russia, Argentina or the United States?"

“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?”

When lending banks take into account what they perceive as safe and as risky. If regulators allow lower bank equity requirements against what’s perceived safe than against what’s perceived risky, could that distort the allocation of bank credit?

"What would you opine of risk weighted bank capital requirements with risk weights assigned for political reasons?"

"How important is bank credit to central banks’ monetary policy?
Is the distortion produced in the allocation of bank credit by the risk weighted bank capital requirements, in any way considered by central banks when deciding on monetary policies?"

“Two options:
A: The most dangerous risks to banking system revolve around what’s perceived as risky
B: The most dangerous risks to banking system revolve around what’s perceived as safe
To which option respectively do the terms geocentric and heliocentric best apply?”

"How much must bank regulators know about risks, before they should be allowed to introduce risk weighted bank capital/equity requirements?"

"What’s more dangerous to bank systems assets perceived ex ante as risky turning out to be risky ex post, or assets perceived as safe turning out risky?"

“Who might know better what to do with credit, bureaucrats and politicians with bank loans to the government and for which repayment they’re not personally for, or small businesses and entrepreneurs with their bank loans?”

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

"Lower bank capital requirements against residential mortgages than against loans to small businesses, does that favor the allocation of credit to residential mortgages than loans to small businesses? If so, could it be regarded as a regulatory distortion?"

"Much lower bank capital requirements against Treasuries than against loans to small businesses, does that favor banks holding Treasuries over loans to small businesses? If so, could it be regarded as a regulatory distortion?"

"1988, with Basel I, for the purpose of bank capital requirements, regulators changed from using a leverage ratio to risk weighted ones. In terms of the impact on the allocation of credit, should that be considered a major historic economic event?"

"Current risk weighted bank capital requirements are based on what’s perceived as risky is more dangerous to bank systems than what’s perceived as safe. How does that square with that the large bank exposures that detonated major bank crises were all built-up with what’s perceived as safe?"

"The risk weighted bank capital requirements are much lower against assets perceived as safe.
Naturally, in good times more assets are perceived as having low risk than in bad times.
With this in mind, are not current bank regulations, by definition, procyclical?"

"In Basel I, Basel II and Basel III, where can we find the efficient allocation of bank credit to the economy in general, specifically identified as a vital purpose of banks?"

"The Congress shall have the power to borrow Money on the credit of the United States." US Constitution. Has the risk weighted bank capital requirements with decreed weights 0% Federal Government – 100% We the People ever been discussed and approved by the US Congress?"
"Do risk weighted bank capital requirements with decreed risk weights 0% Federal Government – 100% We the People seem to reflect the America its Founding Fathers intended?"
"Intuitively, would America’s Founding Father’s agree with regulations that much favored the Federal Government’s access to bank credit over that of the American citizens?"

"With risk weighted bank capital requirements that allow banks to leverage their equity much more with government debt than with loans to small businesses and entrepreneurs, what kind of economy should we expect? In what could it all end?"

"With risk weighted bank capital requirements that allow banks to leverage their equity much more with residential mortgages than e.g., with loans to small businesses and entrepreneurs, what expected effect should this have on the price of houses?"

"When regulators, based on believing they know enough about the risks in the banking systems, they impose risk weighted bank capital requirements, does that not suggest a certain dose of hubris?"
"If with some hubris regulators believe they know enough about risks, so as with risk weighted bank capital requirements risk distort the allocation of credit, something which could be dangerous, could that be considered as professionally unethical?"
"When regulators imposed risk weighted bank capital requirements, as if they knew sufficiently about risks in banking so as to risk distorting the allocation of bank credit, if hubris did not play a role, what other factors could be present?"
"Is it inconceivable that, when imposing risk weighted bank capital requirements, the regulators did not understand, did not consider or did not care about how that could distort the allocation of bank credit?"

"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?"https://subprimeregulations.blogspot.com/2023/06/ai-chatgpt-openai-risk-weighted-bank.html

"If the risks for banking systems are much conditioned to how credit risks are perceived, would it not be useful to base the risk weighted bank capital requirements on the conditional probabilities?"

"Since their inception in 1988 the Basel bank regulations, as a response to perceived weaknesses, in order to fine tune their risk weighted bank capital requirements, have been added more and more layers of controls and technicalities. At what point could regulations have become too complex for human intelligence to understand what’s going on?"https://subprimeregulations.blogspot.com/2023/06/ai-chatgpt-openai-at-what-point-could.html

"Basel Committee, ignoring how it could distort credit allocation, de facto stated: 
'To make your banking system safer, we give you our risk weighted bank capital requirements'. Does that not contain a hefty dose of a populism? One that even confounds the intelligentsia?"
"Assets assigned lowest risk, for which bank capital requirements were nonexistent or low, were what had most political support: sovereign credits and home mortgages". Paul Volcker.
Could that not qualify as regulatory populism? 

"Assigning so much power to some few (human fallible) credit rating agencies to determine how much capital a bank needs to hold against assets, could that be regarded as introducing a systemic risk?"

Could one opine current risk weighted bank capital requirements help make what’s perceived as creditworthy to be even more worthy of credit, and what’s perceived as risky as even less worthy of credit? If so, is this fair access to bank credit?

"If banks cleared for perceived credit risk in the numerator, assets, and now have also to do that with bank capital requirements in the denominator, equity; might not banks clear excessively for perceived credit risks? Is that not dangerous?"

Paul A. Volcker in his autobiography “Keeping at it” of 2018 wrote:
“The assets assigned the lowest risk, for which 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 [meaning one single capital requirement against all assets] … seemed to discourage holdings of the safest assets, in particular low-return US government securities."
What's your opinion on that?

"Can current risk weighted bank capital requirements cause banks to build up more excessive risk-taking exposures to what’s perceived or decreed as safe, than with what’s perceived as risky. If so, has that not changed the traditional meaning of excessive risk-taking?

"If young and want to make sure that when old the economy is sufficiently strong and healthy to pay you decent pensions and social security, would you agree with bank regulators who, with risk weighted bank capital requirements, prefer your banks, over the years, to hold much more “safe” government debt and residential mortgages, than “risky” loans to small businesses and entrepreneurs?"

John Kenneth Galbraith in “Money: Whence it came where it went” 1975, wrote:
“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] … The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done”
At what point can the allocation of bank credit to the economy be more important than the safety of banks?"

"Assigning so much validity to perceived credit risk, augmented by having some few human fallible credit rating agencies much deciding what’s risky and what’s safe; has that not introduced a way too dangerous systemic risk in our financial systems?"

"How credit is allocated is something of extreme importance to a nation. Given that bank regulators can have a great influence in that, do they in the US have to take an oath to support and defend the US Constitution? If not, should they?"

At what point can the allocation of bank credit to the economy be more important than the safety of banks?"

"Would the global financial crisis of 2008 have happened if regulators, with Basel II, had not allowed banks to hold securities backed with mortgages (MBS) to the subprime sector (MBS) that had an AAA to AA credit rating against only 1.6% in capital, meaning an allowed leverage of 62.5 times to 1?"


"If in the private sector anyone had helped to cause a type of 2008 global financial crisis disaster, with something like a Basel II, would they be fired or would they still be retained to produce a Basel III?"

"What would happen to a casino if their roulette game paid out more than what odds merited on “safe” bets, like colors, and paid out less than what odds merited on “risky” bets, like numbers?"

"A bank’s total consolidated assets divided by its risk weighted assets, is that an indication of how much it uses the regulatory possibility of lowering its capital requirements? Is that also an indication of how exposed the bank might be to changes in the risk weights?"

Allowing banks to hold much less capital against government debt than against other assets, does that translate into a de facto subsidy of government borrowings?
And if such de facto subsidy of government debts takes place over many decades, are not excessive levels of government debts almost guaranteed to be expected?
Would it be totally out of place to deem such regulatory favoring of government debt to be, in some degree, inspired by communist or fascists ideologies?

"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?"


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

PS. A Tweet: 
Could #ChatGPT and I be sued by bank regulators for misinformation?
I wish! If only I could meet them in court.
Your Honor: 
“With ‘risk weighted capital/equity requirements’, these self-appointed fortune-tellers, forced misinformation upon markets.”

Tuesday, December 17, 2013

Mr. Alan Greenspan… tell us the story… why were your legitimate concerns waived… what really happened?

In 1998, celebrating the tenth anniversary of the Basel Accord Alan Greenspan gave a speech titled “The Role of Capital in Optimal Banking Supervision and Regulation”, FRBNY Economic Policy Review/October 1998”. Three comments stand out:

First: “It is argued that the heightened complexity of these large bank’s risk-taking activities, along with the expanding scope of regulatory arbitrage, may cause capital ratios as calculated under the existing rules to become increasingly misleading. I, too, share these concerns”

And there was Greenspan only referring to the measly 30 pages of Basel I… and so how on earth, with this type of miss-feelings, can we now have arrived to our tens of thousands of pages of Basel III and Dodd-Frank Act?

Second: “regulatory capital arbitrage… is not costless and therefore not without implications for resource allocation. Interestingly, one reason that the formal capital standards do not include many risk buckets is that regulators did not want to influence how banks make resource allocation. Ironically, the one-size-fits-all standard does just that, by forcing the banks into expending effort to negate the capital requirement, or to exploit it, whenever there is a significant disparity between the relatively arbitrary standard and internal, economic capital requirements.” 

And so here if the implications for resource allocation (of bank credit in the real economy) is considered as an issue… how on earth did they go from some risk-weights depending of the category of assets, to something even so much distortive for resource allocation as risk weights depending on credit ratings?

Third: “For internal purposes, these large institutions attempt explicitly to quantify their credit, market and operating risks, by estimating loss probabilities distribution for various risk positions. Enough economic, as distinct from regulatory, capital is then allocated to each risk position to satisfy the institution’s own standard for insolvency probability.”

And so what happened to the distinction between economic and regulatory capital? Is it not so that a regulator´s real problem begins when the economic capital is miscalculated by the banks? If so, why the hell would he then want to calculate regulatory capital as it was economic capital?

No I am sorry… Alan Greenspan… as well as his successor Ben Bernanke… and of course all the other regulators like those in the Basel Committee and the Financial Stability Board… they will have a lot of explanation to do… when history finally catches up on them.

And I would certainly not want to be in their shoes. “Daddy why was grandfather so dumb? … It is because of his stupid regulatory risk aversion that banks stopped financing the future and only refinanced the past, and which is why I and my friends now do not have jobs.”

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