#AI #ChatGPT #Grok: With no risk weighted bank capital requirements and instead a leverage ratio of 10:1, where would the Western world be?

I asked ChatGPT:

In less than 300 words:

"Please speculate on where the Western world’s nations could be, had the Basel Committee never introduced in 1988 risk weighted bank capital/equity requirements, and instead required 10 percent of equity against all bank assets… a leverage ratio of 10:1?"

ChatGPT answered:

"Had the Basel Committee in 1988 imposed a simple, non–risk-weighted 10 percent equity requirement against all bank assets, the Western world’s financial trajectory would likely look markedly different.

First, credit allocation would probably have been less distorted. Risk-weighting systematically favored sovereign debt and residential mortgages over loans to small businesses, entrepreneurs, and productive but riskier activities. A flat leverage ratio would have removed regulatory arbitrage incentives, encouraging banks to assess risk through pricing and due diligence rather than by chasing low-risk-weight assets. This could have produced a more balanced growth path, with relatively more financing for innovation, SMEs, and capital formation, and less structural bias toward housing and public debt accumulation.

Second, financial cycles may have been milder. Higher, uniform equity buffers would have made banks more resilient across the board, reducing the amplitude of booms and busts. The 2008 global financial crisis might not have been avoided, but its severity and fiscal aftershocks would likely have been substantially reduced, with fewer taxpayer-funded rescues and less post-crisis financial repression.

Third, central banking itself might have evolved differently. With banks less fragile and less concentrated in government bonds and mortgages, monetary policy transmission would rely less on asset price inflation and more on genuine credit intermediation. This could have constrained the long-run expansion of public debt and limited the political economy pressures for ultra-low interest rates.

In short, a simple 10:1 leverage rule could have yielded a Western financial system that is plainer, more competitive, less crisis-prone, and more oriented toward productive risk-taking—arguably closer to the market-disciplined capitalism that underpinned earlier Western development."

I said:Thanks!

It replied:You’re very welcome. Glad it was useful.

I asked Grok:

In less than 300 words:

"Please speculate on where the Western world’s nations could be, had the Basel Committee never introduced in 1988 risk weighted bank capital/equity requirements, and instead required 10 percent of equity against all bank assets… a leverage ratio of 10:1?"

Grok answered:

"If the Basel Committee had mandated a flat 10% equity requirement against all bank assets—a 10:1 leverage ratio—instead of risk-weighted capital in 1988, Western nations might exhibit greater financial stability but slower economic growth.

Banks would face uniform capital costs, eliminating incentives to game risk weights by loading up on "safe" assets like government bonds or mortgage-backed securities that later proved toxic. This could have averted or mitigated the 2008 Global Financial Crisis, as excessive leverage in risky derivatives and subprime loans would be curbed—banks couldn't amplify returns without proportional equity buffers. Crises like the Savings & Loan debacle or Eurozone debt issues might have been less severe, fostering resilient banking systems less prone to bailouts.

However, credit expansion would likely be restrained. With no discounts for low-risk assets, lending for housing, infrastructure, or business might cost more, dampening booms in real estate and consumer spending. GDP growth in the US, UK, and EU could lag 1-2% annually over decades, per some economic models, prioritizing caution over innovation. Shadow banking might flourish to evade rules, shifting risks outside regulation.

Overall, Western economies might be more equitable and stable, with reduced inequality from fewer asset bubbles, but at the expense of dynamism—resembling pre-1980s conservatism rather than the high-leverage globalization era. Public debt might be lower, as governments couldn't rely on banks hoarding cheap sovereign bonds. In essence, a safer but staider financial world."

I said: Thanks!

It replied: You're welcome! If you have more questions about finance, history, or anything else, feel free to ask.

Note: The answers are copied exactly from those given to me by ChatGPT and Grok.

Here my many other questions to ChatGPT – Grok on bank regulations.

#AI ChatGPT Grok: Speculate on what might have become of Venezuela if all its oil revenues had been distributed to Venezuelan-born citizens?

I asked ChatGPT: 

"Venezuela’s oil, by law, belongs to the nation and so, the net oil revenues, are redistributed by its governments. In less than 300 words, can you speculate on what could have been of Venezuela, if all those revenues were distributed equally to all Venezuela born citizens?"

ChatGPT answered:

"If Venezuela’s net oil revenues had been distributed equally to all Venezuelan-born citizens, the country’s trajectory could plausibly have been very different—though not utopian.

First, political incentives would have shifted. Equal per-capita distribution would have sharply reduced the prize of controlling the state. Oil rents would no longer be a discretionary pool to buy loyalty, fund patronage, or entrench power. This could have weakened caudillismo and made democratic competition less zero-sum, lowering the stakes of coups and authoritarian consolidation.

Second, institutional quality might have improved. When citizens receive transparent, regular oil dividends, they tend to demand taxation in exchange for public services (“no representation without taxation,” in reverse). This dynamic—observed in places like Alaska—encourages scrutiny, accountability, and rule-based governance rather than opaque redistribution through ministries and state firms.

Third, economic diversification would likely have been stronger. Direct distribution avoids the classic resource-curse channel in which state spending distorts prices, crowds out private activity, and overvalues the currency. Households, not politicians, would decide how to spend or invest, supporting entrepreneurship and reducing the bias toward state-led megaprojects.

Fourth, inequality and poverty would have fallen more durably. Oil dividends would function like a universal basic income funded by natural capital, smoothing shocks and reducing dependence on politically conditioned subsidies. Importantly, this would empower individuals rather than client groups.

However, this path would not have eliminated all risks. Weak courts, insecure property rights, and poor macro management could still have undermined growth. Oil price volatility would have required strong stabilization rules. And equal distribution alone would not substitute for education, infrastructure, or sound monetary policy.

Still, compared with centralized control of oil rents, equal citizen ownership would likely have produced a freer, more diversified, and more resilient Venezuela—less rich in slogans, but richer in institutions and individual autonomy."

I asked Grok:

"Venezuela’s oil, by law, belongs to the nation and so, the net oil revenues, are redistributed by its governments. In less than 300 words, can you speculate on what could have been of Venezuela, if all those revenues were distributed equally to all Venezuela born citizens?"

Grok answered:

"If the net oil revenues of a resource-rich nation like Venezuela—historically peaking at $60-100 billion annually during oil booms—had been distributed equally as cash dividends to its approximately 30 million citizens instead of through centralized programs, the country might have evolved into a thriving, citizen-driven economy.

Per capita, this could equate to $2,000-3,000 annually (based on average net revenues of $50-70 billion after extraction costs), similar to dividend models in places like Alaska but amplified. A family of four might receive $8,000-12,000 yearly, alleviating poverty directly without administrative hurdles or misuse of funds.

Economically, such direct transfers could ignite entrepreneurship, with citizens investing in businesses, education, or property, diversifying the economy beyond oil. Reduced dependence on state aid might prevent hyperinflation and currency issues, as local saving and spending fuel steady GDP growth of 4-5% annually rather than economic downturns.

Socially, diminished inequality could reduce mass emigration, preserving human capital and fostering stability. Health and education might advance through private efforts, though public infrastructure like roads and hospitals could require supplementary targeted investments or hybrid approaches.

Politically, decentralizing wealth might encourage greater accountability and democratic practices, limiting overreach by authorities. However, challenges include potential short-term inflationary spending or ongoing resource dependency if not mitigated.

In essence, the nation could mirror prosperous oil states like Norway or the UAE, with empowered citizens driving sustainable progress and averting humanitarian challenges."

Petropolitan

The global coalition of oil cursed citizens.