#AI ChatGPT – OpenAI: Risk-weighted bank capital requirements, does that make it even harder for less creditworthy, to access the opportunities bank credit can provide?

I asked OpenAI:

"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?"

OpenAI answered: 

"Yes, it is possible to opine that risk-weighted bank capital requirements could exacerbate the challenges faced by individuals or entities perceived as less creditworthy in accessing bank credit. The following arguments support this perspective:

1. Reduced credit availability: Risk-weighted capital requirements may lead banks to allocate more capital for loans to less creditworthy borrowers, which could result in reduced credit availability. Banks may become more cautious in extending credit to these individuals or entities due to the higher capital requirements, resulting in limited access to the opportunities that bank credit provides.

2. Higher interest rates: When banks perceive borrowers as higher risk, they may charge higher interest rates to compensate for the potential losses associated with lending to them. Risk-weighted capital requirements can further contribute to this by increasing the cost of capital for banks. As a result, borrowers considered less creditworthy may face even higher interest rates, making it more challenging for them to afford credit.

3. Reinforcing creditworthiness perception: The link between risk-weighted capital requirements and creditworthiness perception is complex. However, the higher capital requirements for loans to less creditworthy borrowers might reinforce the perception that they are indeed riskier. This can create a self-reinforcing cycle, where limited access to credit due to perceived creditworthiness leads to higher capital requirements, which, in turn, restrict access to credit further.

It's important to note that these arguments present one perspective and do not capture the entire range of opinions or the intentions behind risk-weighted capital requirements. Regulators implement such requirements to promote financial stability and protect the banking system. The impact of these regulations on credit access and creditworthiness can vary depending on the specific context and implementation."

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

PS. Decreed Inequality

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

Fight for the American dream giving opportunities to everyone, but not by using a bank in my backyard

I refer to a great report produced by a AEI/Brookings Working Group titled “Opportunity, responsibility and security: A consensus plan for reducing poverty and restoring the American Dream”

With respect to Opportunity it states: “The concept of ‘opportunity’ draws nearly universal support among Americans, and it’s the core concept of the American Dream. We endorse Truslow Adams’ definition of opportunity as the state of affairs when “each man and each woman shall be able to attain to the fullest stature of which they are capable,” regardless of offer opportunity, in this sense, to all its residents… Progressives generally believe that government should be more active and can be more effective than do conservatives. But this difference shouldn’t obscure the fact that nearly all Americans would prefer to live in a society in which opportunities for self- advancement are more widely available, especially to those at the bottom of the income distribution, than is now the case. 

I have no objections, but, from what I have seen, both conservatives and progressives have ignored how regulators affected the opportunities of The Risky to access bank credit.

Regulators, with their credit risk weighted capital (equity) requirements, allow banks to earn much higher risk adjusted returns on assets perceived as safe, than on assets perceived as risky. And that of course distorts the allocation of bank credit in favor of The Safe, those already favored by banks with lower interests and larger loans, and against The Risky, those already punished by banks with higher interests and smaller loans. And that, by impeding The Risky the opportunity of fair access to bank credit, is of course great driver of inequality.

Why is that so ignored by all who write against increased inequality and in favor of opportunities? Could it be a symptom of let’s fight against inequality, and let’s give everyone opportunities, but never ever with the bank in my backyard doing that?

Current credit-risk-weighted capital (equity) requirements for banks, besides being stupid and dangerous, are immoral

This is what the current bank regulators have decreed, on their own, without any real consultations:

The lower the perceived credit risk of an asset, the lower the equity a bank has to have against it… and so of course, the higher the perceived credit risk of an asset, the higher the equity a bank has to have against it.

It is stupid: because never ever have major bank crises resulted from excessive bank exposures to what is perceived as risky, these have always resulted, no exceptions, from excessive bank exposure to something perceived as save.

It is dangerous (even from a national security perspective): because allowing banks to leverage their equity, and the support they receive from taxpayers, differently based on perceived risks, will seriously distort the allocation of bank credit to the real economy and thereby weaken it.

And it is immoral: because having those perceived as risky and who already, precisely because of those perceptions, have less and more expensive access to bank credit, to have even lesser and even more expensive access to bank credit, is an odious and immoral regulatory discrimination, which kills opportunities and increases inequality.

20% credit risk weighted total loss-absorbing capacity (TLAC), is an assassination of the real economy

Mark Carney of the Financial Stability Board has just mentioned the possibility of 20% credit risk-weighted total loss-absorbing capacity for banks TLAC.

That, when lending to for instance one of the AAAristocracy who carries a risk weight of 20%, means the bank would need to hold 4% in TLAC.

But, when lending to a small business, which carries a risk weight of 100%, then the bank would need to hold 20% in TLAC... 5 times more! ...16% more!

This will of course mean that banks will lend too much to “the infallible” at too low interest rates, and never more to small businesses and other “risky” unless at extremely high relative interest rates.

That means in effect an assassination of the real economy

Why do bank regulators deny their children the risk-taking by banks that benefitted them?

“Mark Carney has pledged that taxpayer money should never again be used to prop up banks.” 

And the price for achieving that by discriminating against the "risky", will foremost be paid by the poor, increasing the inequalities. Good job!

America, more bank capital (equity) required for loans to “The Risky” than to “The Infallible”, is contrary to Liberty & Opportunity

P.S. A confession that shall not be heard: “Assets for which bank capital requirements were low or nonexistent were what had most political support: residential mortgages and government debt. A simple ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker

Yesterday, in the good company of friends who above all value liberty, I visited the Statue of Liberty for the first time. As a son of immigrants, though not to America, looking at her my eyes went tearful, thinking about the challenges of leaving all behind, and beginning, from scratch, a new life in a new unknown foreign country.

And sitting there listening to a great audio guide I was reminded all the time of that she, Lady of Liberty, stood there greeting all, to the Land of Freedom and Opportunities.

And it all made me reflect again on the fact that current bank regulations, odiously discriminate against what is perceived as “risky”... And my eyes went tearful again. Let me explain.

Of course, an unknown immigrant arriving to Ellis Island, with nothing or little to his name, would be perceived as risky by any banker, and therefore be charged higher interests, be lent lesser amounts, and have to accept stricter terms, than what applied to those residents of the Americas who already had the opportunity to made a good name and some assets for themselves.

But, those days, luckily, there was not a bank regulator in America who ordered that, on top of a bankers natural risk-adverseness, banks also needed to hold much much more capital when lending to “The Risky” than when lending to “The Infallible”.

And so those days’ bankers were free to apply their own criteria, and “The Risky” free to access opportunities, without the interference of some dumb and overly concerned nanny.

Now though, since 1988, Basel Accord, bank regulations are based on capital requirements which are much much lower when lending to “The Infallible” than when lending to “The Risky”. And that means that banks make a much much higher risk-adjusted return on assets when lending to The Infallible, than when lending to The Risky.

And that means that a current immigrant, or an American who has not yet made it to the AAAristocracy (or the AAArisktocracy) has much lesser opportunities of obtaining a bank credit to make real the kind of American dreams that made America what it is… because please don’t tell me that America was just built upon house ownership credit cards and consumption.

Dear Friends, "The Home of the Brave" should not accept this kind of suicidal regulatory risk-aversion, which stops banks from financing the "riskier" future and only propels these to refinance the "safer" past.

Though only a layman, the way I read the law, it seems to me it is even prohibited.

God make us daring!

PS. On any Thanksgiving Day, Americans should be deeply grateful for all those who dared take the risks they all needed, and for those days bank regulators did not stand in their way. 

PS. I am not an American, but since my father was freed from a concentration camp by Americans in 1945… I confess being much biased in its favor… at least of that 1945's America.

PS. I have absolutely no objection to all the security measures taken around the Statue of Liberty but, the way some security officers voiced their authority, unfortunately, made me think of a sacrilege.

PS. Risk weights of 100% for the Sovereign and 0% for “We the People” reads like a slap in the face of USA’s Founding Fathers

PS. Here is an aide memoire on the mistakes in the risk weighted capital requirements for banks.

PS. And here are some of my early opinions on these regulations, some of them while being an Executive Director at the World Bank, 2002-04

PS. And here's is my 2019 letter to the Financial Stability Board

PS. And here is a very humble home-made youtube comment on it all, from 2010