#AI #OpenAI #ChatGPT – What kind of bank capital/equity requirements generates more jobs for regulators and supervisors?

I asked ChatGPT:

Consider banks having to hold e.g., 10% in capital/equity against all assets (leverage ratio) or, alternatively, be subjected to risk weighted capital/equity requirements. Which alternative would empower and generate more jobs for bank regulators and bank supervisors?

ChatGPT answered:

Implementing risk-weighted capital/equity requirements would likely empower and generate more jobs for bank regulators and bank supervisors compared to a simple leverage ratio requirement. Here’s why:

1. Complexity and Expertise

• Risk-Weighted Requirements: This approach involves assessing the risk profile of each asset class and assigning different capital requirements accordingly. Regulators would need to develop, update, and enforce complex models and risk assessments, which require specialized knowledge and skills in risk management, finance, and statistics.
• Leverage Ratio: A straightforward leverage ratio requires banks to hold a fixed percentage of capital against total assets, irrespective of the risk. This simplicity means fewer specialized roles are necessary.

2. Continuous Monitoring and Adjustments

• Risk-Weighted Requirements: Continuous monitoring of the risk profiles of banks’ assets is necessary. Regulators need to evaluate changes in market conditions, update risk weights, and ensure compliance. This creates ongoing work and the need for continuous training and updates.
• Leverage Ratio: Once set, a leverage ratio requires less frequent adjustments and monitoring, resulting in fewer ongoing regulatory activities.

3. Regulatory Reporting and Compliance

• Risk-Weighted Requirements: Banks need to report detailed risk assessments of their asset portfolios regularly. This requires regulators to review and audit these reports, leading to more regulatory scrutiny and thus more jobs.
• Leverage Ratio: Reporting is simpler, focusing primarily on total asset values and capital held, leading to less regulatory oversight.

4. Innovation and Development of Risk Models

• Risk-Weighted Requirements: The development and improvement of risk models is an ongoing process. Regulators would need teams dedicated to research, model validation, and stress testing.
• Leverage Ratio: There is minimal need for complex model development, reducing the demand for specialized regulatory roles.

5. Training and Certification

• Risk-Weighted Requirements: The complexity necessitates specialized training programs for regulators and supervisors, creating additional roles in training and certification.
• Leverage Ratio: Basic training suffices, resulting in fewer roles dedicated to education and certification.

Conclusion

Risk-weighted capital/equity requirements would generate more jobs for bank regulators and supervisors due to the need for specialized skills, continuous monitoring, complex reporting, and the development of risk models. The leverage ratio approach, while simpler and easier to implement, would not create as many specialized regulatory roles.

I finalized with: Thanks!

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

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

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

 

Basel I, July 1988 = 28 pages

Basel II, June 2006 = 333 pages

Basel III, July 2024 = 1,910 pages

And we have not seen the endgame yet. And each time we understand less and less.

“If one is pretending to knowledge, one does not have, one cannot ask for explanations to support possible objections” John Kenneth Galbraith 

Ground control to Major Tom

https://x.com/PerKurowski/status/1809268636487467309

Most concerns about derivatives derive from the fact that it sounds so delightfully sophisticated

In a derivative, there is a buyer and a seller, and so whatever happens someone wins and someone loses and in essence it’s a wash out… of course as long as all can live up to their commitments. 

But, in a real market loss, like that of a lower value of a stock, a lower value of a painting, or a lower value of a real estate, there is at that time only a loser… and no winner… that is unless you count he who way back have earlier sold the stock, the painting or the house. 

And in this respect the trading in derivatives will depress much less the market than a depression of the values of the underlying vanilla assets. 

The big fuss that is raised around the issue of trading of derivatives, again, besides the possibility of one side of the trade not living up to his commitments, has much more to do with the fact that “derivatives” sounds so delightfully sophisticated when you let it roll down your tongue. 

But topping that must be the introduction of “delta, vega and curvature risk” into the discussions. Just read the index of the Basel Committee’s “Minimum capital requirements for market risk” of January 2016. Mindboggling! Do those who are responsible for what is coming out of the Basel Committee truly understand the implications of that for the banking system? 

I am quite sure that John Kenneth Galbraith’s “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”, applies to most bank regulators… perhaps to all. 

Otherwise how come the real failures of the risk weighted capital requirements for banks, are not yet even discussed?

PS. My 2019 letter to The Financial Stability Board

PS. 2024: Inviting comments the Basel Committee issued a document on Technical Amendments. On e.g., “SCO60.80: Curvature charge for Group 2a crypto-assets”, I challenge you to draft a comment that an economist like me could understand.

“delta, vega and curvature risk” Basel Committee’s member understand less and less what they are doing, by the minute

To read the Basel Committee’s “Minimum capital requirements for market risk” of January 2016 is truly mindboggling. Do yourself a favor and just look at the index.

Do those really responsible for what is coming out of the Basel Committee truly understand what is said there?

I'm sure that John Kenneth Galbraith’s “If one is pretending to knowledge, one does not have, one cannot ask for explanations to support possible objections”, applies to most [perhaps all] of them.

And it is not like the Basel Committee has shown itself to be a good regulatory body. It has actually been one of the most failed ones… so failed that they should have been prohibited from having anything to do with bank regulations… forever.

Do you really think its current Chair, Stefan Ingves, could provide you with a lucid explanation of it?

I know enough about finance to know when our banks are being dug even deeper in the hole in which they should not be.

The regulators wrote that the bank capital requirements are portfolio invariant because … otherwise it “would have been a too complex task for most banks and supervisors alike”... and now they come with "delta, vega and curvature risk"?

PS. 2024: Inviting comments the Basel Committee issued a document on Technical Amendments. On e.g., “SCO60.80: Curvature charge for Group 2a crypto-assets”, I challenge you to draft a comment that an economist like me could understand.