#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

Neoliberalism’s history is not being correctly recorded

The two policies most mentioned in connection with neoliberalism (please google it) are “privatization”, referring to that the private sector knows better, and “deregulation”, referring to that it's better when the government interferes less. And one of the moments most mentioned about when neoliberalism crumbled, is the 2008 global financial crisis GFC.

But, in 1988, with Basel I, bank capital requirements changed from one single capital requirement e.g., 10 percent against all assets, to multiple risk weighted requirements, and with its most defining weights being 0% the government, 100% citizens. Basel III, the short version, contains 1626 pages.

So, banks being allowed to leverage more their capital... meaning making it easier for banks to earn higher risk adjusted returns on equity with government debt than with loans to e.g., small businesses and entrepreneurs, please, what has that to do with the private sector knowing better what to do than the public sector?

So, deregulation, please, has that not much more to do with putting regulations (with all its possible miss-regulations) in overdrive?

And please, would there ever have been a 2008 GFC if banks had been limited to leverage their equity 10 times with AAA to AA rated mortgage-backed securities, and not the 62.5 times European banks and US investment banks 2004’s Basel II allowed them to do?

Does arguing this make me defender of neoliberalism? No and Yes! 

I often identified the privatizations, for instance of utilities, as just a trick by the bureaucrats in turn to lay their hands on some easy fiscal revenues, which would later have to be repaid by us consumers through higher tariffs.

But, do I believe that small businesses and entrepreneurs know better what to do with bank credit than the bureaucrats not personally responsible for the repayment of it do? You bet!

Has the end of neoliberalism in 1988 been recorded for the history books? No! There's surely many who even swear it is still alive and kicking.

PS. You don't have to just take my word on it: “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