#AI ChatGPT: If young and wanting a strong and healthy economy when you grow old, are current risk weighted bank capital requirements what you need?

I asked ChatGPT:

"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?"

ChatGPT answered:

"Bank regulators often use risk-weighted capital requirements to ensure the stability and soundness of the banking system. These requirements aim to align capital levels with the perceived risk of different types of assets. Under risk-weighted capital requirements, "safe" assets like government debt and residential mortgages typically receive lower risk weights, while "risky" assets such as loans to small businesses and entrepreneurs receive higher risk weights.

The preference for banks to hold a larger proportion of "safe" assets, such as government debt and residential mortgages, can be attributed to their lower perceived risk and potential to provide stability to the financial system. These assets are generally considered less volatile and more liquid, which can enhance the resilience of banks during economic downturns.

However, it is important to note that risk-weighted capital requirements are not without their criticisms. Critics argue that these requirements can create distortions and unintended consequences. For instance, an excessive focus on risk weights for different asset classes can lead to a concentration of lending in certain sectors, potentially reducing the availability of credit to small businesses and entrepreneurs, which are considered riskier but vital for economic growth.

Balancing the need for financial stability and the promotion of economic growth is a key challenge for regulators. Recognizing the importance of small businesses and entrepreneurship in driving innovation and economic development, some regulators have taken steps to address the potential negative impacts of risk-weighted capital requirements on lending to these sectors.

In conclusion, while the preference for banks to hold more "safe" assets like government debt and residential mortgages under risk-weighted capital requirements aims to ensure financial stability, it is crucial to strike a balance that supports both stability and the necessary provision of credit to small businesses and entrepreneurs. Regulatory frameworks should continuously evolve to address these challenges and promote a robust and inclusive economy."

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

PS. Please free us from imprudent risk aversion and give us some prudent risk-taking.

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

“The raison d’être of macroprudential policy is to ensure the financial system supports the economy.” Mark Carney left out: “EFFICIENTLY”.

Mark Carney In his last speech as Governor of the Bank of England stated:

“The raison d’être of macroprudential policy is to ensure the financial system supports the economy.”

Yes, but absolutely not in the way of how a brochure at the Bank of England’s museum, explaining quantitative easing, states it, by: “Putting more money into our economy to boost spending”

Our financial system should support our economy by allocating financial resources as efficiently as possible… and that, with current risk weighted bank capital requirements is something it definitely does not achieve. For example:

Assigning a risk weight of 0% to the sovereign’s debt and one of 100% to the citizen’s debts de facto implies that a bureaucrat knows better what to do with a credit for which’s repayment he is not personally responsible for than for example and entrepreneur. And that sort of veiled communism has failed here, there and everywhere.

Assigning a risk weight of 0% to residential mortgages and one of 100% to debts of unrated entrepreneurs’, de facto implies that financing the purchase of a house is more important than financing those who could help create the jobs needed to be able to service utilities and repay mortgages… something which I hope everyone understands is not so. It caused houses to morph from being affordable homes into being risky investment assets.

Assigning a risk weight of 20% to corporate AAA rated debt and one of 150% to corporate debt rated below BB-, de facto implies that the former, besides being able to obtain much more credit and at much lower rates, also deserves even better terms… and that is plainly an immoral discrimination… and besides an utterly stupid one. Anyone who believes that the excessive bank exposures that could cause profound bank crises are built up more with assets rated below BB- than with assets rated AAA, has never ever left his desk and walked on Main-Street.

Soon the history on banking will include: Between 1988 and 202x, believe it or not, banks were regulated by experts using risk weighted bank capital requirements based on that what was perceived as risky, was more dangerous to our bank system than what was perceived as safe

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html