We would appreciate Google’s DeepMind (or IBM’s Watson) giving the Basel Committee some tips on intelligent thinking

Sir, I refer to Clive Cookson’s “DeepMind overcomes memory block to bring thinking computers a step closer”, October 13.

Here again we read about so much research going on in the world of artificial intelligence. Though clearly still a lot needs to be done, the current advances could perhaps suffice in order to give some good tips to some humans who do not seem to be able to get their thinking quite right.

Yes! You’ve guessed it Sir. I am indeed referring to the Basel Committee of Banking Supervision and their risk weighted capital requirements for banks. Perhaps it would be easier for the regulators to hear out some observations on how to regulate banks, if it came from an impressive “differentiable neural computer” with AI capability, and not from a simple non-expert human like me.

So, if Google’s DeepMind (or IBM’s Watson) were able to only convey the importance of first defining clearly the purpose of banks before regulating these; and second to do some empirical research on why bank systems fail, that could be extremely helpful for the banks, for the real economy, and of course for the future of our grandchildren.

Then regulators, swallowing their pride, could perhaps, with luck, understand both that the main social purpose of banks is to allocate credit efficiently to the real economy; and that no major bank crises have ever resulted from excessive exposures to what was ex ante perceived as very risky, as these have always resulted from unexpected events, or from excessive exposure to what was ex ante considered very safe, but that ex post turned out to be very risky.

That could help to free us all from our banks being guided by dumb risk-weighted capital requirements… more ex ante perceived risk more capital – less risk less capital.

Not only do these cause our banks to misallocate credit to the real economy, like no credit to “risky” SMEs or entrepreneurs; but also to make our bank system more unstable by pushing the build-up of exposures to what is perceived, decreed or concocted as “very safe”, without requiring sufficient capital to cover for the unexpected events.

PS. DeepMind, or you Watson, if you would also care to explain this to those in the Financial Times, that would be doubly appreciated. I have tried to do so with literarily thousands of letters, but still no luck… I guess I am not as impressive as you are.

@PerKurowski ©

Artificial intelligence has a clear advantage over humans; a smaller ego standing in the way of admitting mistakes.

Sir, Murad Ahmed, writing about Demis Hassibis states: “At DeepMind, engineers have created programs based on neural networks, modeled on the human brain. These systems make mistakes, but learn and improve over time” “Master of the new machine age” March 12.

Ooops! I hope they do not use as models the brains of current bank regulators.

In 2007-08 we had a big crisis because AAA rated securities and sovereigns like Greece, perceived and deemed as safe, turned out to be very risky.

And what connected all that failure, was the fact that banks were allowed to hold very little, I mean very little, we are talking about 1.6 percent or less in capital, against those assets, only because these were ex ante perceived or deemed to be very safe.

Of course, anyone who knew anything about the history of financial crises would have alerted the regulators that to allow banks to have less capital against what is perceived as safe than against what is perceived as risky, was very dumb. That since major crises only result from excessive exposures to something ex ante perceived as risky but that ex post turns out to be very risky. And one of the main reasons for that is precisely that too many go looking for “safety”.

But now we are in 2016, and the issue of the distortion those capital requirements produce in the allocation of bank credit to the real economy is not yet even discussed. 

So before these human brain systems learn and improve over time from mistakes, they have to be able to understand these and, more importantly, to humbly accept these.

Frankly, artificial intelligence seems it could have an advantage over humans’, namely none of that human ego that so much stands in the way of admitting mistakes.

But also beware, were robots free of that weakening ego, they could conquer us!

@PerKurowski ©