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

They inject loads of liquidity, keep interests ultra-low and distort bank credit… and then they call the system results, systemic risks

Sir, Colby Smith reports “the booming $1.3tn market for leveraged loans — or those extended to highly indebted companies that are then packaged up and sold to investors as bonds — has faced a tide of criticism from central bankers and financial watchdogs. Former US Fed chair Janet Yellen warned of the “systemic risk” rising from the loans.” “Systemic risk fears intensify over leveraged loan boom” October 30.

Smith quotes Douglas Peebles, the chief investment officer for fixed income at AllianceBernstein with “Investors are deathly afraid of rising interest rates so the floating rate component paired with the fact that these loans have seniority over unsecured bonds set up an easy elevator pitch to buyers that may not be fully aware of the risks”

Why are investors deathly afraid of rising interest rates? Clearly because the rates being so low for so long, paired with huge liquidity injections has built up a mountain of fix rate bonds that few dare touch; except those who by means of lower capital requirements are given strong incentives to go there, like banks and insurance companies.

In this respect “the booming $1.3tn market for leveraged loans” is not a systemic risk but a system result. That regulation that increases the exposure of banks and insurance companies to long term fixed rate bonds, and thereby increases the interest rate risk, that is a real systemic risk. The problem though is that central bankers and regulators will never want to understand they are the greatest generators of systemic risks… as Upton Sinclair said “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

@PerKurowski