#AI ChatGPT - OpenAI: A question on behalf of FT and Martin Wolf.

 In "Britain needs a growth strategy" Martin Wolf mentions the UK has for too long settled for managing stagnation.

On behalf of FT and Martin Wolf I decided to ask ChatGPT:

"Could bank capital requirements that favors “safe” government debt and residential mortgages over “risky” loans to small businesses and entrepreneurs, doom a nation to stagnation?"

ChatGPT answered:

"The impact of bank capital requirements on economic growth is a complex and debated topic among economists. Capital requirements are regulations set by financial authorities that determine the amount of capital a bank must hold in relation to its assets. These requirements are designed to ensure the stability of the financial system by reducing the risk of bank failures.

If capital requirements heavily favor "safe" assets such as government debt and residential mortgages over "risky" loans to small businesses and entrepreneurs, it can potentially have both positive and negative effects on the economy.

Potential Positive Effects:

Financial Stability: By incentivizing banks to invest in safer assets, capital requirements can contribute to financial stability. This reduces the likelihood of bank failures, which could have broader systemic consequences.

Investor Confidence: Investors and depositors may feel more secure knowing that banks are holding assets that are considered safer, leading to increased confidence in the financial system.

Potential Negative Effects:

Stifling Innovation and Growth: If banks are discouraged from lending to small businesses and entrepreneurs, it could hinder innovation and economic growth. Small and medium-sized enterprises (SMEs) are often drivers of job creation and economic dynamism.

Inequality: Focusing on "safe" assets may exacerbate economic inequality. Small businesses, startups, and entrepreneurs, which are crucial for innovation and job creation, might face difficulty accessing the necessary funding.

Reduced Economic Diversity: A banking system overly concentrated on certain types of assets may lead to reduced economic diversity. This can make the economy more vulnerable to shocks in specific sectors.

Long-Term Stagnation: Overemphasis on "safe" assets might lead to a lack of risk-taking and investment in new ventures, potentially resulting in long-term economic stagnation.

Balancing Act:

It's crucial for financial regulators to strike a balance between stability and promoting economic growth. Prudent capital requirements that consider the riskiness of assets, while still allowing banks to support economic development, can be important. Striking the right balance often involves ongoing adjustments to regulations based on economic conditions and lessons learned from past experiences.

In conclusion, while capital requirements that favor "safe" assets can contribute to financial stability, an excessive focus on them at the expense of riskier but potentially innovative investments could indeed have negative consequences for a nation's economic dynamism and growth. The challenge lies in finding a regulatory framework that mitigates risk without stifling entrepreneurial activity and economic progress."

Thanks!

ChatGPT answered: You're welcome! If you have any more questions or if there's anything else I can help you with, feel free to ask. Happy to assist!

Note: The answers are copied exactly from those given to me by OpenAI

Here my many other questions to ChatGPT – OpenAI on bank regulations

Comment: Way back, 2009, Martin Wolf was kind to publish in his Economic Forum an articled I titled "Please free us from imprudent risk aversion and give us some prudent risk-taking." I stand by it more than ever.

Financial liberalism died when the Basel Committee establishment concocted the risk weighted capital requirements for banks

Sir, Joe Zammit-Lucia writes: “True liberals have always understood the need for continual reform as stagnating systems inevitably get progressively captured by powerful interests. Liberalism dies when it becomes the Establishment, itself captured by vested interests and an apologia for the status quo” “True liberals understand the need for reform” December 29.

What better example of that than when the regulatory establishment, gathered in the mutual admiration club of the Basel Committee decided to protect with lower capital requirements for banks the lending to the safer status quo than any lending to a riskier future.

Bankers loved it, because that allowed them to fulfill their wet dreams of being able to achieve the highest risk adjusted returns on equity on what is perceived as safe; and lower capital requirements naturally opened up much more space for their own bonuses.

Regulators, dumb enough to take ex ante perceived risks to represent real ex post dangers love it, because they think they are making banks safer.

And the world stagnates because of that risk aversion, and turns statist as regulators risk-weighted sovereigns with a 0%, thereby subsidizing public borrowings.

http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

@PerKurowski

Jean-Claude Juncker, while bank regulatory risk aversion remains, Europe will stall and fall, no matter what you do

Sir, Sarah Gordon writes: “There is no doubt that a boost to investment in Europe is still needed. Its recovery since the financial crisis has been the weakest in 30 years, and most of the region’s economies are still underperforming their potential. The Juncker plan was an ambitious and imaginative attempt. But as for many such grands projets, implementation has lagged behind conception” “Juncker’s European investment plan: rhetoric vs reality” March 29.

But in parallel to that, the regulators, with their risk weighted capital requirements for banks, distorted the allocation of credit to the real economy. 

By doubling down on risk perceptions they de facto decreed that those perceived as risky, like SMEs, were less worthy of bank credit than those perceived as safe, like sovereigns.

And Jean-Claude Juncker, not wanting to criticize technocrat colleagues preferred to launch this bureaucrats directed investment plan. 

Forget it! While current bank regulatory risk aversion remains, Europe has no way to go but to stall and fall.

Here my pending questions that are not answered by the regulators. 

@PerKurowski

The 2007-08 crisis and the relative stagnation thereafter would not have happened without current bank regulations

Sir, Ed Crooks writes “Trump has threatened to “do a number” on Frank-Dodd banking regulations aimed at preventing another financial crisis.” “Populists push to roll back rules” February 22.

Well no! Except for the intent of eliminating overreliance on credit rating agencies, something that has yet to happen, the Dodd-Frank Act did not eliminate those populist bank regulations that caused the last financial crisis, or the relative economic stagnation thereafter.

Some real runaway populism, that happened when hubris filled technocrats thought they could, and at no cost, diminish the risks for the banking system with their risk weighted capital requirements for banks.

What did and does that regulation cause?

That the banks create dangerously large exposures to what is perceived, rated, decreed or concocted as safe, e.g. AAA rated securities and Greece. 

That the banks award too little credit to what can supply dynamism to the real economy, e.g. SMEs and entrepreneurs.

Crooks also writes: “In a 2012 OECD expert paper, David Parker of Cranfield University and Colin Kirkpatrick of the University of Manchester reviewed the state of academic knowledge and concluded that there were large gaps in our understanding of the effects of regulation policy”

I have not read that paper, but I am sure the conclusions must be absolutely correct. For instance, when regulators stress test banks, they do not even care to look at what should perhaps have been on their balance sheets, in order to satisfy the credit needs of the real economy.

It is amazing how the Financial Times insists on keeping all this hushed up.

Does that mean FT agrees with the regulatory statism reflected in assigning to the sovereign a risk weight of 0% while hitting us “We the People”, with 100%?

Does that mean FT finds nothing dumb in assigning a 20% risk weight to the so dangerous AAA rated, while hitting the innocuous below BB- rated with 150%?

Sir, here between you and me, what favours do you owe the bank regulators, or why are you so afraid of them?

PS. The Dodd-Frank Act is so surreal that in its 848 pages it does not even mention the Basel Committee

PS. I dare you to read an Op-Ed I wrote in 1999 about the dangers with regulations

PS. I dare you to read the remarks I gave to bank regulators in 2003 while being an Executive Director of the World Bank.

@PerKurowski

It is Robert Jenkins and his bank-regulation buddies who, as an absolute minimum, should be placed on the naughty step

Sir, Robert Jenkins writes “Prioritizing competitiveness is precisely what led to lax regulation”, “A little longer on the naughty step will benefit banks” September 7.

While prioritizing competitiveness between banks, trying to make these follow similar rules all over the world, regulators introduced the risk weighted capital requirements for banks.

That piece of regulation impeded those borrowers perceived as risky, like SMEs and entrepreneurs to compete fairly for access to bank credit, and therefore decreed inequality and economic stagnation.

That piece of regulation, by motivating banks to build up dangerous excessive exposures to what was perceived, decreed or concocted as safe, like AAA rated securities, financing of houses and loans to sovereigns (like Greece), caused the 2007/08 crisis.

Robert Jenkins, as former member of the Bank of England’s Financial Policy Committee should, together with all his bank regulation buddies, as an absolute minimum, should be placed on the naughty step.

Personally I would prefer them having to parade down some major avenues wearing dunce caps and forever be barred from having anything to do with any type of regulations… I mean how dumb can you be to believe that what is perceived as risky is riskier for the banks than what is perceived as safe.

Info: Basel’ private sector risk weights: for AAA rated = 20% and for below BB- 150%

@PerKurowski ©

There are many reasons we the aging should pray for the young allowing us to fade away with grace

Sir, Manoj Pradhan explores the question: “What will the future hold for the world’s ageing populations” and titles his article “Ageing economies will grow old with grace” October 14. That is indeed a sunny view; let’s pray for it.

When Pradham writes: “The elderly will resist moving out of their homes; a huge wave of construction will be needed to house the young and the millennials” some difficult questions linger: Are the young and the millennials willing to cast themselves as the downstairs and allow the upstairs elderly to stay in their homes? Will the savings and pension plans of the elderly be sufficient for them to stay in their homes? With retirement comes the wish to hold savings more liquid and so who is going to finance that huge wave of construction?

As I have argued for years, bank regulators, with their capital requirements based on perceived credit risk, which has given perceived credit risk too much weight, has caused a stagnant world… and to keep social structures amiable to all in a stagnant world is not an easy task. 

In March 2007 Peter Peterson, in FT, concluded his “Sacrifice can solve the entitlement crisis”, by citing the German theologian Dietrich on the ultimate test in moral society being the world it leaves for the children, and saying that “It is time for us to become worthy and moral ancestors.”

And in August 2006, finished an article I sent to FT, but that was not published with the following:

“It is said that in Scandinavia, a long time ago, when the older people felt that they stood in the way of the young, they threw themselves off steep cliffs known as an ättestupa. These days it could seem like quite the opposite, if we consider how our democracies might have been captured by us baby boomers. We need to revise urgently how our society deals with the next generations, before they throw us down an ättestupa—for damned good reasons!”

Sir, there are many reasons we the aging should pray for the young allowing us to fade away with grace.

@PerKurowski ©

Economic stagnation is doomed to happen as a consequence of credit-risk-weighted capital/equity requirements for banks.

Sir, Wolfgang Münchau holds that secular stagnation in the Eurozone is very probable “The euro is in greater peril today than at the height of the crisis” November 10.

It is worse than that, stagnation is doomed to happen, as a result of credit-risk-weighted capital requirements for banks that impede the access to bank credit of many who though “risky” would provide the new sources of growth Europe needs to move forward.

Frankly, where does Wolfgang Münchau believe his Europe would be had these risk-adverse regulations been adopted some two hundred years ago?

Again: Europe is denying its children the risk taking it took for the European parents to prosper. Shame on it!

No Mr. Robin Harding. Fear of risks, dooms the economy to stagnation.

Sir, if I understand it correctly, Robin Harding wants us to pick one of two possibilities. That in which “the interest rates are too low, but the economy is fundamentally healthy, or the bleak one, in which case “central bankers have written the right prescription, but the patient´s condition remains perilously weak”, “Fear of bubbles hides the dangers of stagnation”, July 30.

Not so Mr. Harding! Fears, by regulators, of banks lending too much to what is perceived ex ante as risky, as if such a thing has ever happened, has doomed the world to stagnation. When banks, by means of risk weighted capital requirements are told they can earn much higher risk-adjusted returns on equity when lending to what is perceived as absolutely safe, there will not be the sufficient lending to what is perceived as risky, like SMEs and entrepreneurs, for the economy to grow.

No risk-taking... no growth... it is as simple as that!

Regulation which favors access to bank credits of the “safe” over the “risky” dooms the economy to stagnate

Sir, Martin Wolf in support for his usual begging for fiscal deficits to be invested in infrastructure, refers to Lawrence Summers in that “the high-income economies seem to be worryingly unable to generate good growth in demand without extreme credit instability”, “How to stir life into a stagnant world”, April 30. And I wonder what they consider “extreme credit instability”? Is it, as I presume they mean having banks lend to the “risky”? If so, that is totally wrong!

As I see it, the real poison that has infected our economies, are the capital requirements for banks based on ex ante perceived risks that were introduced with Basel II, in June 2002. These regulations allow banks to earn much higher risk-adjusted returns on equity when lending to the “safe” than when lending to the “risky”; which obviously results in the banking system lending much too little to the risky, like medium and small businesses, entrepreneurs and start-ups, and much too much to the “infallible”.

And that Wolf is able, in April 2014, to write about “changes in portfolio preferences towards safe assets” without mentioning these pathological risk adverse regulations hard to understand, that is unless he has a personal reason for hiding it.

At all times we hear about the importance of risk taking… only last night in America, in “The Voice”, one of the judges, Blake Sheldon, reminded the performers that “the worst thing you can do is to play it safe”.

Our bank regulators have got it so unbelievably wrong. Any real risk management session, in order to keep the right perspective, should start with the question of: What is the risk we cannot afford not to take? And in banking the answer would be: We cannot afford to stop our banks from opening the “risky” doors behind which we might those lucky nuggets that will keep our real economy moving forward, so that it does not stall, so that it does not fall.

Sir, of course we have a stagnant world! How could it be otherwise with these bank regulations?

And if to top that up you take into account that all bank crisis always result from too much exposures to something erroneously considered safe, and none because of excessive exposures to what is considered risky, then you really begin to understand how absolutely insane these bank regulations are. 

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

More than a new normal, stagnation has been decreed, by risk adverse regulators, as the new structural standard.

Sir, Lawrence Summers writes “The risk of financial instability provides yet another reason why pre-empting structural stagnation is so profoundly important”, “Why stagnation might prove to be the new normal” December 16. 

And I do not know what to say to that. It was precisely well intended but horribly executed efforts to avoid financial instability which basically has decreed stagnation as the new standard.

When regulators risk-weighted capital requirements for banks, they allowed banks to earn much higher expected risk adjusted returns on assets perceived as “absolutely safe”, than on assets perceived as “risky”.

And that translates into bank credit, one of the most important drivers of growth, not going any longer go to finance the “risky” future, but only to refinance the “safer” past.

And how you can avoid stagnation with that kind of misplaced risk-aversion beats me.

Does Professor Summers really believe that the economies of West would have become what they are with that kind of bank regulations?

Any economy growth based solely on “easy money”, and not based on astute risk-taking, is doomed to solely become froth on the surface.

And all for nothing as the current financial instability has, as usual, been created by excessive bank exposures to what was officially perceived as “absolutely safe”, like AAA-rated bonds, real estate in Spain, loans to Greece etc.

US, and the Western World, is becoming “the home of the risk-adverse”.

Sir, I, as most humans, am extremely risk-adverse, and that is why I have always appreciated the role of designated risk-takers that the banks perform for the society. We cowards were used to worry our bankers were too cowards to, with their lending of the umbrella while the sun shines and taking it away when it rains. But then came the bank regulators and with their capital requirements that discriminate fiercely based on perceived risks made it all so much worse. 

Martin Wolf comments on the “Great Stagnation” by Tyler Cowen of George Mason University, December 21. What they both fail to identify is that requiring banks to have a lot of capital when the perceived risks are high, and allowing them to hold minuscule capital when the perceived risks are low, stacks the returns on bank equity against what is perceived as risky. And that has nothing whatsoever to do with what made “the Home of the brave” big. The US is now, as is most of the Western World, becoming the Home of the risk-adverse. 

Not taking risks is about the most dangerous things a society can do… as the only thing that can result from that is the overcrowding of the ex-ante safe-havens