March 24, 2017

The Basel Committee for Banking Supervision was sold a regulatory algorithm that used the wrong data.

Sir, Richard Waters writes: “a new layer of technology is being added to turn [big data] into the learning that makes applications more intelligent. It represents an emerging tech infrastructure that makes AI (artificial intelligence) not just a new application but a new approach to computing.” “Crowdsourced algorithms promise to be next big thing” March 24.

I register again, for the umpteenth time, the following comment:

Bank regulators, when they defined their risk weighted capital requirements for banks, which so much influences the allocation of bank credit to the real economy, looked at the risk of the assets, and not at the risk those assets posed to the bank system.

As a result they came up with that loony theory that what is perceived as very safe, is safer for the banking system that what is perceived as risky. That’s why they assigned only a 20% risk weight to what can be so dangerous as what is rated AAA to AA, and 150% to the so totally innocuous below BB-rated.

That caused a crisis because of excessive exposures to what was rated AAA; and low growth because of lack of exposures to what is perceived as risky, like to the 100% risk weighted SMEs and entreprenuers.

Sir, that is why all algorithms being developed should be required to carry a warning signed saying “Applying this to the wrong data, can be truly disastrous”