How long will it take for bank regulators to ask AI regulators for a little favour?

Sir, Michael Skapinker writes: “Why did no one speak up “inside Sil­icon Val­ley Bank before it col­lapsed? People thought speak­ing up would leave them vulnerable to vic­tim­isa­tion.” “Listen and you might learn something” FT July 17.

Thought, or knew? 

What should a risk manager know about the risk of informing the board that according to revised models that included the interest rate risk (duration), SVB’ risk weighted capital/equity requirements would increase substantially? 

Would a bank supervisor like to go on record informing his superiors, the regulators, that because of IRR, the 0% risk weighting of long-term US Treasury bonds made no sense?

Sir, instead of exposing humans to victimisation, it seems precisely the moment that we could make great use of artificial intelligence. 

E.g., I asked ChatGPT – OpenAI: “Should regulators and supervisors be aware of risks with US Treasury long-term bonds? 

It answered: “Yes, they should be aware of the duration risk and interest rate risk associated with long-term Treasury bonds held by banks”

But of course, AI could be vulnerable to victimisation too.

I asked Open AI:” Can those who become an Artificial Intelligence regulator, make you or any other AI participants agree with all they want you to agree with?” 

It answered: “Regulators aim to address ethical considerations, potential risks, and ensure responsible AI practices… AI systems don't possess independent consciousness or the ability to willingly agree or disagree with regulations. Their behavior is determined by their programming and the data they have been trained on.”

Sir, you know much to well, that for more than two decades I’ve been vociferating, as much as I can, my criticism against the risk weighted bank capital requirements. Clearly when someone does want to hear, he does not hear. For instance, as Upton Sinclair Jr. explained it: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Therefore, when I heard about OpenAI, I asked it a series of questions. From the answers you must agree I found an ally. I just wonder how long it will take for bank regulators to shut it up. “We can’t have someone questioning the risk weights of 0% government – 100% citizens. Can we?”

How long will it take to FT to really listen to some of its faithful subscribers?

PS. US Treasury long-term bonds still carry a 0% risk weight.

https://subprimeregulations.blogspot.com/2023/04/chatgpt-openai-should-bank.html

https://perkurowski.blogspot.com/2023/07/ai-chatgpt-open-ai-artificial.html

https://subprimeregulations.blogspot.com/2023/06/my-questions-to-chatgpt-openai-about.html

@PerKurowski

I don’t envy editors nowadays being forced to flexibilize journalistic ethics more than ever, in order to survive

Sir, John Thornhill describes many amazing innovations. “Bold claims for AI are hard to compute for economists” of February 21.

Without expressing the slightest doubt about Thornhill’s integrity one could still ask: are these innovations true, fake-news, or just one of those stories designed to sell you an investment? 

Sir, how extremely difficult it has to be an editor nowadays. If you’re too severe with the facts, you might loose the juiciness of your stories that your readers might demand; if you’re too generous, you will loose your paper’s reputation sooner or later. I surely don’t envy you.

But when Thornhill refers to that a “Master Algorithm”, named so by Pedro Domingos, a computer science professor at the University of Washington “will be the last invention that man makes. And that “It will be able to derive all knowledge in the world — past, present, and future — from data”, then I have to reply, as I often did to the former President of the World Bank James Wolfensohn, one who loved to refer to the bank as the “Knowledge Bank”, that knowledge means nothing if it is not tempered by wisdom.

@PerKurowski

Dear Sir, using your extraordinary savoir-faire and FT’s immense influence, please educate our bank regulators

(I will try it the Lucy Kellaway way “How to ask for what you want — and get it every time” February 6.)

Sir, the world needs for you and your astonishing influential paper, as always without fear and without favour, to inform bank regulators about that their current regulations is based on a fundamental mistake, a sort of the mother of all “alternative facts”; namely that what is AAA to AA rated, is much safer for the banking system than what is rated below BB-.

That, in their standardized risk weights, has caused them to assign a meager 20% risk weight to the very dangerous AAA-risktocracy and 150% to those made so innocuous by being perceived ex ante as very risky.

Most probably because I am so unimportant, I have not found a way to transmit to the regulators the real truth, namely that excessive exposures to what was perceived as risky when placed on banks’ balance sheets have never caused a major bank crisis. That dishonor belongs to unforeseen events (like devaluations), criminal behavior, and to what was ex ante perceived as very safe but that ex post turned out to be very risky.

But Sir, with your importance and extraordinary savoir faire I am sure you would be able to reach out to them, discreetly if you so wish.

When you do, the world will owe you immense gratitude because, as is, this mistake has created such distortions in the allocation of bank credit to the real economy that our banks are no longer financing the riskier future our children needs to be financed, but only refinancing the safer past and present.

If they are too hardheaded and you need some backup argument, you could always quote Voltaire to them “May God defend me from my friends, I can defend myself from my enemies”

Yours always, admiringly and cordially

Per Kurowski

PS. Here some of my questions the regulators have refused to answer.

Why has the Financial Times, and other, kept silence for so long about some obvious mistakes in bank regulations?

Sir, Wolfgang Münchau now finally writes: “We should start making a distinction between the interests of the financial sector and the economy at large”, “Reform the economic system now or the populists will do it” December 19.

Of course we must. I have soon written 2.500 letters to FT, many to Wolfgang Münchau, pointing out the fact that our loony bank regulators did not find it necessary to define the purpose of the banks before regulating these. Their risk weighted capital requirements allow banks to earn higher expected risk adjusted returns on what is perceived as safe, than on what is perceived as risky. That might help bankers’ wet dreams come true, but does clearly not serve the interests of the real economy or even the long-term stability of the banks.

Münchau also writes: “We should not be surprised that people have become sceptical about experts who peddle theories that result in comically wrong predictions and that do not square with the reality they perceive.”

Indeed, why should we trust regulators who “comically” believe that what causes bank crises is what is ex ante perceived as risky?

But Sir, since lack of contestability has allowed these ludicrous regulations to survive for way too long, even after a huge crisis made its mistakes evident, we also need to understand how a qualified media like the Financial Times, and other, can be blinded, or silenced for so long on this issue.

@PerKurowski

I am a whistleblower on Basel Committee’s monstrous mistakes, but FT might not have seen my 2.375 letters either

Sir, Ben McLannahan discussing whistleblowers and the fake-account scandal at Wells Fargo writes: “One even wrote an email in exasperation to John Stumpf, the former chairman and chief executive. (He said he had not seen it.)” “Providing incentives for whistleblowers will improve bank culture” October 21.

Well I have been denouncing, for over a decade, among other with 2.375 letters to FT, this one not included, that the risk weighted capital requirements for banks concocted by the Basel Committee for Banking Supervision and supported by the Financial Stability Board, and not questioned by for instance IMF, is a dangerous monstrosity.

Not only does it distort the allocation of bank credit to the real economy, but it also does so for no good purpose at all, since major bank crises never result from excessive exposures to something that was perceived as risky when booked.

Perhaps one of these days its editor, and many of its columnists, will also argue they never saw these letters.

If someone who like me has argued consistently and extensively against these globally imposed regulations, cannot be helped by a Financial Times to at least obtain from the regulators clear and unequivocal the responses to his objections, then it could seem those regulators might also be using some very insidious pressures to silence those who “Without fear and without favour” are supposedly best equipped to give whistleblowers some voice.

PS. Here again is an aide memoire with some of my objections.

@PerKurowski ©

Lucy Kellaway is my large glass of wine that keeps me suscribing to FT and writing letters to its (quite dumb) editor

Though that would clearly be highly unethical journalistic behavior, it is clear that someone somehow must have issued a strong, very strong, recommendation to ignore my letters to the Financial Times.

And obviously that should have me raving mad and cancelling my suscription to FT.

But it is when I read something so great like Lucy Kellaway’s

“The reply consisted of one word: Noted. This was the perfect passive aggressive response. It was just about polite enough for me to have no legitimate grounds for complaint. It shut down the discussion, and left me with only one sensible course of action — to pour myself a large glass of wine and see”

... that all is forgotten. That it is just the kind of my large glass of wine that keeps me suscribing to FT... and keeps me writing letters to You Dear Editor.

With my very best regards

Per Kurowski

PS. I sure hope and pray this will not create any trouble for Lucy Kellaway. Sir, I swear she’s innocent!

@PerKurowski ©

Tim Harford, FT, yes, let us be real blunt: criticism works, but only when it is acknowledged.

Sir, I refer to Tim Harford’s “Let’s be blunt: criticism works” September 13.

Let me cite from John Kenneth Galbraith’s “Money: Whence it came, where it went” 1975: “What people do not understand, they generally think important…[but] If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”

That describes the case where the walls have become too high for constructive criticism to even be acknowledged by the participants.

Take for instance the Financial Times. For a decade, in thousands of letters, I have informed its editor, its reporters and its columnists, of some serious weaknesses in the portfolio-invariant credit-risk weighted capital requirements for banks. Yet I have not been able to get any assistance in transmitting to the regulators some simple questions asking for explanations.

For instance this very straightforward question: Dear regulator. Since dangerous financial excesses do always result from building up too large exposures to assets that are ex ante perceived as safe but that ex post turn out to be risky, why must banks hold more capital against what is ex ante perceived as risky?

The regulators do not want to answer little insignificant me… but, if it was FT who formally asked for explanations that would of course carry much more weight.

And frankly is not asking for explanations “Without fear and without favour” that what journalism is all about? Why then do you not then stop pretending you know so much and dare ask for some explanations? Or is this just too much criticism for you to swallow?

I am not only asking FT for help. I just send out a message to all US congressmen and governors with a list of questions it behooves them to make to the Fed, FDIC, and OCC.

@PerKurowski

Citizens should question the purpose of banks, but FT should also have a duty to forward those questions.

Sir, Saker Nusseibeh writes that citizens should question the purpose of the financial system “Systemic moral hazard is embedded in current economic view”, FTfm August 2.

Indeed, but that is mostly because the regulators never found it necessary to define the purpose of our banks, before regulating these.

With technocratic arrogance they decided that when banks lend to “safe” governments and to members of the AAArisktocracy, these should be allowed to hold much less capital (equity) than when lending to the “risky”, like to the SMEs and entrepreneurs.

That meant that banks would then in relative terms lend more and at lower rates to “safe” governments and members of the AAArisktocracy, than they would in the absence of these regulations.

And that means, almost explicitly, that regulators believe “safe” governments and members of the AAArisktocracy can use bank credit more efficiently than what SMEs and entrepreneurs can do. And that is of course pure and unabridged lunacy.

I have been questioning those capital requirements, for more than a decade, in soon 2.000 letters to the Financial Times. Long time ago I was told these were ignored because I was becoming tiresome and monotonous… as if that has anything to do with the fundaments or importance of my questions.

Again, FT why do all of you believe capital requirements for banks, those which are to cover for unexpected losses, should be higher for the risky than for the safe, only because the former present higher expected losses? I dare you to give me one single reason for it and then be willing to debate it publicly.

@PerKurowski

PS. From a 2003 World Bank workshop on bank regulations: “I have been sitting here for most of these five days without being able to detect a single formula or word indicating that growth and credits are also a function of bank regulations.”

In the movie “Mission Impossible: Rogue Bank Regulators”, FT could play a leading role.

Sir, Nigel Andrews, when reviewing “Mission: Impossible — Rogue Nation” and because someone there says “Today is the day the IMF’s luck runs out” mentions this “Sounds like a case for the Financial Times”, “Fantastic nonsense of a mission implausible” July 31.

Clearly it not, since there “the Impossible Missions Force puts its lives on the line to combat The Syndicate, a group of global agents/ spies gone terrorist”

But what if the next Mission Impossible movie had team Cruise fighting against those rogue statist regulators who, for purposes of determining the capital requirements for banks, imposed risk weights of 100 percent on the private sector and zero percent on the government? That would surely be a case for the Financial Times. In fact then FT, with its silence about the distortions those regulations cause in the allocation of bank credit to the real economy, could even have the right to ask for a leading role in the film. Now if FT gets that role, I wonder who would play you, The Editor, and who Martin Wolf?

Of course, since there are so many expert technocrats/bureaucrats that play a prominent role in the Basel Accord incident, the production would be star studded. Because there are so many “Chauncey Gardiner" characters in the plot, it is truly unfortunate Peter Sellers is not with us any longer. Can you imagine how good he could have been as Mario Draghi?

Often unanswered emails speak much louder than those answered… as well as help to build a case.

Sir, I refer to Lucy Kellaway’s “My solution to the maddening silence of ignored emails” February 2.

You know that in my case I have thousand of unanswered emails of those I sent to the Financial Times and its journalists over the years. And most of these have to do with that regulatory asteroid that hit the earth in 1988, the Basel Accord, and that have ever since distorted the allocation of bank credit to our real economy.

Am I mad because of that? Absolutely not! Quite often unanswered emails speak much louder than those answered.

I know that my criticism and my warnings about what the Basel Committee is doing are based on realities, and so I just have to bide my time. When the truth finally comes out, FT’s silence merits a chapter of its own in the book that will result… and Sir, may I predict you will hope you had answered many more emails.

Meanwhile let me heed some of Kellaway’s advice: “There is no shame in pestering: in a world in which people have largely given up answering at all, it is moronic to ask only once. If the answer was always going to be no, nagging can’t make things worse. And there are enough people… who allocate their time not to those they want to see most but to those who persist longest.”

When silencing my criticism of the distorting risk-weighted bank capital requirements, who were the Financial Times favouring?

Sir, Bilal Khan correctly explains in his letter some of the sad consequences of risk-weighted capital requirements, “Bank's reluctance on private lending is rational” June 11.

And Khan writes “We must ask ourselves why we continue with a regulatory system that failed to ensure any semblance of stability during the financial crisis… and now renders unorthodox monetary efforts to stimulate growth largely ineffective”

Well if Mr. Kahn would enter my blog TeaWithFT and review the several hundreds of letters that over many years I have sent the Financial Times on precisely this issue, he would have to conclude that one of the reasons we are beginning to hear about this problem only now in May-June 2014, is that the Financial Times decided to silence my voice of protest in order to favour… I do not who?

Just think of all the hundred thousands of bank loans that over this period could have been given to medium and small businesses, to entrepreneurs and start-ups, if only FT had helped me to argue on its pages about how immoral and outright stupid it is to distort the allocation of bank credit by discriminating against those whose access to bank credit is already sufficiently difficult because of being perceived as “risky”… and that even though no bank crisis ever has resulted from too much bank exposure to what was ex ante correctly or incorrectly perceived as being risky.

PS. I am sure the censuring treatment given to me must have made many of FT’s journalists quite uncomfortable.

I am a whistleblower, on lousy bank regulators, and FT, not withstanding its “Without fear and without favours”, also ignores me.

Sir, William D Cohan writes about the travails of “Wall Street whistleblowers”, May 31. In it he writes about “how little the regulators charged with keeping watch over the Wall Street banks seem to care about holding them in any way accountable”. The same can be said about how little those in charge with keeping watch over the regulators, like the Financial Times, seem to care little about holding them in any way accountable.

Since years back I am a whistleblower, on the Basel Committee for Banking Supervision, accusing it for having designed absolutely useless and even dangerous bank regulations. And though very few can demonstratively prove to have alerted from a reasonably high position bureaucratic post about what was wrong, the silence with which FT has met all my comments, has been deafening.

Just as an example, in a written formal statement at the World Bank, as an Executive Director I warned “

We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

And FT itself published one letter, in January 2003, in which wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is”; and another letter, in October 2004, in which I asked “How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?” 

But, just in case, am I arguing that anyone of the regulators has committed and illegal act for which they should be jailed? Of course not! Only that they have been so dumb that we need to parade them all down Wall Street, wearing dunce caps – or cones of shame… in order to increase our chances that the regulators think twice next time they feel as Masters of the Universe… and perhaps they should be joined in the parade by the editor of FT.

PS. Here is the link to my over 1.300 letters to FT on the subject.

PS. One day perhaps there will be a whistleblower within FT willing to explain it all :-)