#AI #OpenAI #ChatGPT As a grandfather, should I be concerned about how Basel bank regulators might have shaped the future my grandchildren will encounter?

Below the conclusion in the dialogue I had with ChatGPT on this issue. You can read the whole conversation here.

I asked ChatGPT:

"So, trying to conclude; for the best of my grandchildren’s future, had it not been best if the Basel Committee had not begun to distort the allocation of bank credit with the risk weighted bank capital/equity requirements?"

ChatGPT answered:

Yes, in many ways, it's fair to say that the Basel Committee's risk-weighted capital requirements, particularly those that favor public debt and residential mortgages, may not be the optimal approach for the long-term economic prosperity of your grandchildren. By distorting the allocation of bank credit, these regulations have had several unintended consequences that could negatively affect the broader economy over time.

Key Issues with the Basel Approach:

1. Distorted Credit Allocation: Basel regulations incentivize banks to lend where the risk-weighting is lowest—mainly government debt and residential mortgages—at the expense of more dynamic sectors like small businesses and entrepreneurship. This limits access to credit for high-growth sectors that drive innovation, economic expansion, and job creation, thus slowing overall economic dynamism.

2. Increased Systemic Risks: By pushing banks to hold more government debt and mortgage-backed assets, the system becomes more homogeneous and less resilient. When crises hit these sectors, the effects are more widespread and severe. Examples like the 2008 financial crisis (fueled by mortgage-backed securities) show that concentration in a "safe" asset class can be a huge risk.

3. Stifling Innovation and Economic Growth: Small businesses and startups, typically more dependent on bank credit than large corporations, are squeezed out of the credit system. As a result, future generations may see slower job creation and economic opportunity, which is essential for a thriving, innovative economy. This could make it harder for your grandchildren to find opportunities in high-growth sectors or start their own businesses.

4. Long-Term Fragility: While these rules may provide short-term stability, they can foster long-term economic fragility. An overreliance on public debt and housing markets makes the financial system more vulnerable to large-scale crises in these sectors, which could hurt future generations more severely than smaller, more localized risks in other areas of lending.

Alternatives for a Healthier Future:

Had the Basel Committee encouraged more balanced credit allocation—without such heavy favoritism toward certain asset classes—banks might have been more inclined to lend to small businesses, entrepreneurs, and other high-growth sectors. This would likely lead to:

More Dynamic Economic Growth: By providing adequate funding to small businesses and startups, there would be more room for innovation and job creation, which would benefit future generations.

Greater Diversification: A more balanced allocation of credit across various sectors would reduce systemic risks. Banks would be less likely to concentrate too much exposure in areas like public debt or housing markets, making the system more resilient to crises.

Stronger Economic Foundations: A diversified banking system, funding a range of economic activities, builds a stronger economy less prone to the boom-bust cycles associated with over-reliance on specific asset classes.

Conclusion:

Yes, had the Basel Committee not introduced such a heavy risk-weighting bias that favors public debt and residential mortgages, it’s likely that the banking sector could have supported a more diverse and resilient economy. This might have provided your grandchildren with greater opportunities for entrepreneurship, more dynamic economic growth, and less exposure to systemic risks that could lead to future crises. By creating a more balanced and equitable financial system, the long-term prospects for future generations would likely be improved.

I told ChatGPT:

"I see you agree that, as a father and grandfather, I have all kinds of reasons to be concerned with what some besserwisser bank regulators have concocted during the last decades with the Basel regulations. So, thanks!"

ChatGPT answered:

You're absolutely right to be concerned, and it's completely understandable to question the decisions that have shaped the financial world your children and grandchildren will inherit. The complexities of banking regulations often have long-term consequences that aren't immediately apparent, and it's important to recognize how these policies could affect future generations.

If you ever want to discuss more or explore other areas of concern for the future, I'm always here to help.

I said: Thanks again. I will come back!

ChatGPT said: You're very welcome! I look forward to our next conversation. Take care, and feel free to reach out whenever you're ready!

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

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

Pension funds - not yet!

For over ten years I have been enthusiastic about the implementation of pension funds such as those developed in Chile. I have assisted numerous related seminars, both in Chile as well as in Venezuela. We have finally come to the point where there is general acceptance in the country of the basic concepts involved and legal and political blessing seems just around the corner. Why, then, do I not feel satisfied? 

We have often seen the elderly treated in a very humane and civilized manner in poor and underdeveloped societies. We have also seen horrifying situations in countries with immense wealth and development. There seems to be, then, no real direct link between the wealth of a country and the quality of care it supplies for its elders. Obviously, the existence of economic resources facilitates care while the absence of the same can render even the best of intentions totally useless. 

In Chile, Peru and other countries in which pension funds have been established, these are only part of a series of measures and instruments aimed at returning economic rationality to their respective economies. In each of them, the fact that they have achieved strong and healthy growth, thereby allowing pension funds to obtain excellent returns, has undoubtedly contributed to the latter’s popularity. I doubt that any pension fund, no matter how well regulated, managed with utmost responsibility and subjected to the most efficient supervision, would have had the slightest chance of surviving and becoming an example for other countries should they have been developed in an economy managed by Salvador Allende or Alan Garcia. 

In order to guarantee the future of young, adults and elders alike in Venezuela, it is more important to achieve the reforms that insure that oil income such as that we have garnered in the last twenty years does not continue to go down the drain, than it is to simply introduce pension fund schemes. On the contrary, the development of pension funds in actual circumstances before the country has had the chance to find its way forward, could simply result in the disparaging of an excellent idea. 

This must necessarily be taken into account by all those that, in their search for business opportunities, are falling all over each other to assert their rights to administer the funds. The day a new generation of elderly accuses a fund administrator of bad management, it will be useless for the latter to argue that the State (synonym for politicians thirsty for fiscal resources required to complement reduced oil income) obliged them to invest in public securities. It will also be useless to look for absolution using the argument that they are not at fault that new devaluations have severely eroded the value of their patrimony. 

To assume responsibility of a pension fund is serious business. Even though I am certain that the private sector would be more efficient than the public sector, I believe that under present circumstances results would not be sufficiently satisfactory. If the country’s thinking population is satisfied with the mere introduction of pension funds, they are simply supplying politicians with the next generation of scapegoats. 

I would be ready to sacrifice for all time to come, the existence of pension funds managed by the private sector and even to accept the creation of a new Seguro Social in the hands of CorpoMercadeo professionals in exchange for fundamental reforms. I would even be ready to do so against a simple constitutional reform that would prohibit future contracting of external and internal debt by the public sector. I’m certain this trade off would be of great value to our future population of retirees. 

Finally, let us not forget that living in a society implies the continuous allocation and reallocation of resources. Should all our elders (myself included) become millionaires (in real terms) as a result of their investments in pension funds while the rest of the country lags behind and is not able to participate in this well being, let me assure you that future generations, in all their right, will certainly not allow us to peacefully enjoy our old age. 

For God’s sake, until when will we have to listen to siren songs about possible real returns in an unreal country.

Published in The Daily Journal of Caracas