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

Regulatory easing, if done right, could make risk managers of banks care about real risks, not just about capital reductions.

Sir, Laura Noonan reports that risk models have more uses than assessing capital levels “Regulatory easing will not kill off the model makers” March 13.

What kinds of easing? Because of the risk weighted capital requirements for banks, risk managers have lately been operating with one single mandate… namely that of reducing the capital needed, so as to help maximize the allowed leverage, so as to be able to produce truly large risk adjusted returns on equity.

In essence that has signified that banks, if compared to Volkswagen, have been able to control their own emissions, with the emission managers having been instructed to maximize these. Crazy? Yes!

So if the easing signifies the elimination of different capital requirements for banks, then risk managers could begin to serve a real purpose instead of a regulatory one.

Then SMEs and entrepreneurs would be able to compete on level ground for access to bank credit with sovereigns, AAA rated or residential mortgages, as they have been able to do during around 600 years, before the Basel Committee messed it all up for them. 

But Sir, I am not sure that is the kind of regulatory easing banks are after.

@PerKurowski

If that’s what the best and brightest can come up with, we’re toast!

Sir, Gillian Tett, in “Banking may lose its allure for the best and brightest” November 1, mentions “government does not control finance as tightly as it did in the 1930s”. But, let me assure her that back in those days, no government would ever dream of assuming the role of risk-manager for the world and dole out risk-weights which determine different capital requirements for bank assets based on perceived risks. 

Ms Tett also writes of “a possible silver lining for policy makers” namely that the best and brightest after the failure of the financial sector can now flock into other fields such as manufacturing or medicine. But in this respect should we not begin by understanding better why the best and brightest failed so miserably... before giving them new assignments?

Bank regulators should keep it simple, and not allow complexity to distract them from their real business.

Sir, as you know by now, I agree completely with the need for simplifying bank regulations, like recently suggested by Andrew Haldane, and now also strongly supported by Sebastian Mallaby, “Regulators should keep it simple”, September 5. 

But, my reasons for doing so, are not really because the issues are too complex, and the data is too hard to gather, but because the regulators have no role playing risk-managers to the world, and thereby risk adding distortions to the markets; their role is to prepare for when complex risk-management fails. 

Look at what happened! Bankers react of course to the perceived risks, by means of interest rates, amounts of exposure and terms of loans, and so, when too creative busybody regulators came along and used the same perceived risks to set their capital requirements; the whole banking sector overdosed on perceived risks… and so now we have a crisis because of obese dangerous bank exposures to what was perceived as absolutely safe, and anorexic bank exposures to what was officially perceived as “risky”, like small businesses and entrepreneurs. 

There is an economic war raging, so we need ministers and bank regulators with vision, not janitors and nannies!

The bankers are what bankers always have been… not so bank regulators.

Sir, in “Changing Banking” September 3, you hold that “banks need to behave more responsible”. Of course, who would argue with that? But the subject you avoid touching with a ten foot pole, is that bank regulators too, must behave much more responsibly. 

Just as examples they are irresponsibly regulating the banks without having defined a purpose for the banks and they have irresponsibly appointed themselves as risk managers for the world, doling out risk weights here and there, which determine the capital requirements for the banks and which so dangerously distort the markets. 

No! The bankers are what bankers always have been… not so the bank regulators. 

PS. Yesterday I managed to sit down a prominent and important bank regulator in my chair, though he remained invisible and quite silent 

http://subprimeregulations.blogspot.com/2012/09/a-conversation-with-prominent-and.html

Yes, Basel III has to be thrown out the window, in its entirety, current bank regulators too

Sir, Brooke Masters, September 1, reports that Andrew Haldane, at Jackson Hole, made a “Call for simpler bank oversight” which “would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years”. 

As you must know by now, even though you quite diligently have set your mind on ignoring it, I have for almost a decade held that bank regulators are not just some few degrees wrong, but 180 degrees wrong, and so I cannot but agree with Haldane. 

His argument is in line with that of mine that holds that, by accepting to engage banks through complex regulations, the regulators have acted less as regulators and more as risk-managers… which does not make any sense, since a regulator’s prime responsibility is to prepare itself for when risk-management fails. 

But there are of course many more reasons to throw Basel III, and the current Basel Committee regulators too, out of the window. Unfortunately, no matter how wrong one can prove them to be, getting rid of it and them is no easy task, especially when even a Financial Times want to treat them with kid gloves.

We did not have a crisis because of a general lack of bank capital!

Sir, Tony Jackson discusses the “Basel struggle to put bank capital into perspective” June 27. In doing so he evidences how he and most others discussants tend to forget that bank crisis does not result from lack of capital but by the banks doing the wrong type of lending. Suppose all the banks in a nation had 100 percent capital and then lost it all lending to some sovereign, like Greece, would that mean that the taxpayer would have no losses? How do you separate the taxpayers´ wellbeing from the citizens´ wellbeing? Let us never forget that at the end of the day, it is the quality of the lending of banks that matters the most, not their capital.

My point has all the time been that whenever regulators act like risk managers and set different risk-weights for different lending, which will effectively mean different capital requirements on different lending, they are effectively interfering in such a way that will guarantee that the quality of the lending will be worsened. We did not have a crisis because of a general lack of capital we had a crisis because for some type of lending the regulators authorized basically no capital at all.

From a nanny we should only expect she cares for the risks perceived, but, from our regulators we have the right to expect they care for the risks that are not perceived.

Those at the nucleus may not even know they´re there.

Sir, John Kay writes that “Those at the nucleus may not have the best view” February 2. Indeed, but that is so much worse, when those at the nucleus are not even conscious they´re there.

For instance the Basel Committee which with such hubris took upon itself to act like the risk-managers of the world, assigning the risk-weights that determines how much capital the banks need to hold for different assets, according to their credit ratings, is not even aware of that by doing so it determined Ground Zero for other risk-managers; and continue therefore to complain about the ability of bankers.

Our future is (hopefully) not this!

Sir, Martin Wolf titles his article assessing the financial crisis “How the crisis catapulted us into the future” February 2. I am not so sure of that since it seems that in many important aspects, our past has just catch up on us, and we´re still stuck in it. Let me explain.

This crisis was caused by regulators, who with hubris took upon themselves to play the role as the supreme risk-manager of the world, and created an unstable ground zero for the rest of risk-managers, by authorizing for instance banks to leverage over 60 times their capital, just because a triple-A rating was involved.

Prominent names, like Martin Wolf, have not yet even begun to question the wisdom of that… and surely (hopefully) our future should have no room for such regulatory meddling and distortion of the markets.

The era of regulatory distortions should draw to a close

Sir, Richard Dobbs and Michael Spence write “The era of cheap capital draws to a close” February 1. Given the current losses, would not this era, in these terms, be more accurately defined by calling it the era of “capital cost postponements”?

Also, given that if banks had been limited to more traditional leverages, we would never had seen the credit expansion that occurred, was it really cheaper capital we saw or was it not an era of regulatory distortions?

It was arbitrary regulatory discrimination which caused bank credits to be relatively very cheap for anything that could dress itself up to be perceived as low risk, as bank equity could then leverage more than 60 to 1, and relatively much more expensive for what could not do so, and for which bank leverage was kept to a 12 to 1. That is what pushed the world into financing houses in the US and other “safe” places and away from infrastructure and machinery and other “unsafe” ventures.

If there is anything we should ask for now, that is for the financial regulators to immediately stop acting with such hubris as the risk-managers of the world.

For markets to work the regulator needs to act as a regulator and not as a risk-manager

Sir, “Time finally to make banks safe” you correctly write on February 1, yet you fail to understand that for market discipline to be restored, it is imperative that regulators keep their hands out of the markets, instead of, with their capital requirements for banks based on perceived risk of default and as risk-weighted by the regulator, acting with incredible hubris as the self appointed risk-manager of the world.

In other words you can order whatever basic capital requirement you want for banks… 9 percent or 100 percent… but that will not mean anything if you then water down some of these capital requirements by applying minuscule risk-weights. In fact the higher the basic capital requirements for banks are, the higher will the distortions produced by different risk-weights be.

The regulators set “Ground Zero” for most of the risk management of banks… and we need that “Ground Zero” not to be a distorted reflection of their arbitrary and regressive regulatory risk-adverse bias.

Ps. Truly I do not understand what little Per Kurowski might have done to FT, for FT to decide they prefer to shut him up, before having his opinions heard.

And the Oscar for lax risk management should go to… The Bank Regulators!

Sir Tom Braithwaite in “Financial crisis report to blame Wall Street” January 26, reports that “The Financial Crisis Inquiry Commission will on Thursday blame unchecked Wall Street excess for much of the 2008 turmoil, highlighting lax risk management …and insufficient regulation”

I am not fully sure of the reasons the “Republican commissioners refused to endorse the report”, they usually are too Fannie Mae focused, but in my mind the report is fundamentally wrong. If anyone has to receive an Oscar for lax risk management that has to be the Basel Committee who with incredible hubris took upon themselves the role as risk-managers of the world, by means of their capital requirements for banks based on risks and that allowed among others for an insane bank leverage of over 60 to 1 just because a credit rating agency had perceived something to be a triple-A… in a world where we know for a fact that there is an absolute scarcity of true sustainable triple-As.

Since what was clearly pure lousy regulation is classified in the report as “insufficient regulation” then that may indeed be part of the agenda of those who want to regulate us more, and now even want to take care of pro-cyclicality and systemic risk; stubbornly refusing to acknowledge that they as regulators and governments are most to blame for pro-cyclicality and systemic risk. If there was an Oscar for the most intrusive and distorting regulations, that would be well-earned by the bank-regulators too.