July 16, 2017

Had our current bank regulators been instructed by robots, we might not be in this mess

Sir I refer to Jeevan Vasagar’s “My first robot” July 13.

Why do I argue the possibility indicated in the title? Because perhaps robots could have been able to help their students to shake off sentimentalities and primal emotions a bit more, and taught for instance our regulators that what is risky for banks, is not what they also intuitively could feel to be risky to our banks, but quite the opposite.

What is fervently believed safe, like something with an AAA rating, is what can cause banks to generate excessive and dangerous exposures; on the contrary, what is believed risky, as something rated below BB-, is what bankers won’t touch with a ten feet pole.

But what did the regulators educated by humans do? In Basel II they assigned a risk weight of 20% to what is AAA rated, and one of 150% to the below BB- rated.

And so we would not ended up with a 2007-08 crisis caused by an excessive exposure to AAA rated bonds and sovereigns like Greece; and we would not be suffering a slow response to all QE and low interest stimuli, caused by the lack of loans to “risky” SMEs and entrepreneurs.