#AI #OpenAI #ChatGPT: Are bank regulators thinking of themselves too much as Gods?
I asked ChatGPT:
In “Against the Gods" 1996, Peter L. Bernstein wrote that the boundary between the modern times and the past is the mastery of risk, since for those who believe that everything was in God’s hands, risk management, probability, and statistics, must have seemed quite irrelevant.
When the regulators held, they knew enough about the future and risks, so as to decree risk weighted bank capital/equity requirements, could one not argue that:
The Basel Committee members, with loads of hubris, thought of themselves a bit like Gods?
That God’s hand was left out way too much, and that one capital requirement against all bank assets, a leverage ratio, when it comes to knowing it all, would better express our humans’ lackings?
ChatGPT answered:
Yes, one could certainly argue that the Basel Committee, in designing risk-weighted capital requirements, exhibited a degree of hubris—akin to assuming they could foresee financial risks with a precision that history has often shown to be illusory. By assigning different risk weights to assets, regulators implicitly presumed they could reliably quantify and categorize risk across time and financial cycles, despite the ever-evolving and unpredictable nature of markets.
A simpler leverage ratio—one uniform capital requirement against all assets—would acknowledge the limits of human foresight and avoid the illusion of precise risk measurement. It would recognize that risk is often hidden in places regulators least expect, and that past risk assessments can become dangerously outdated in crises.
In that sense, leaving "God’s hand" out too much—by over-relying on human judgment and statistical models—might have led to regulatory frameworks that failed when reality diverged from predictions, as seen in the 2008 financial crisis. A leverage ratio, by not pretending to know the unknowable, would better reflect our human limitations in mastering risk.
I said: Thanks!
It replied: You're very welcome! Always a pleasure to discuss these topics with you. Let me know if you’d like to dive deeper into anything else.
Note: The answers are copied exactly from those given to me by ChatGPT
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