#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that risk is often hidden in places regulators least expect, and that past risk assessments can become dangerously outdated in crises.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

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

Was Sofia Goggia singing her national anthem with such fervor just being another Italian populist? NO!

I refer here to Nobel Laureate Michael Spence’s “The Italian Economy’s Moment of Truth” Project Syndicate July 7.

Spence writes:“Italian banks currently holding considerable amounts of government debt would suffer substantial balance-sheet damage.” 

Why is that? Is it perhaps because bank regulators allow banks to hold Italian debt against the least capital, meaning they can leverage it the most, meaning they can earn the highest expected risk adjusted returns on equity on it? Yes!

Then Spence writes: “Moreover, Italy needs to develop the entrepreneurial ecosystems that underpin dynamism and innovation. As matters stand, the financial sector is too closed, and it provides too little funding and support for new ventures.” 

Why is that? Could it be because regulators require banks to for instance hold more capital against loans to entreprenuers than against residential mortgages? Yes!

Spence writes: “Italy has enormous economic potential. But the challenge lies in unlocking it, which will require several things to happen.”

One reason for that is that the option to restore competitiveness by means of devaluing its currency was closed when the Euro was adopted, and the EU authorities have been too busy with other minutia over the last 20 years so as to concentrate on how to solve the immense challenge with creating a union by pushing a common currency instead of a common currency resulting from a union.

The best of the Winter Olympics 2018 for me was seeing Sofia Goggia singing her Italian national anthem with such enthusiasm. But there was not one bit of Europe present in her voice… and that is an indication Europe is not going in a European direction. Was she a populist?

Let’s face it. Americans dream they are American. Few if no Europeans, dream they are Europeans.

E.g. How many Europeans know how to sing the EU anthem “Joy to the World”?

PS. The euro has done nothing to solve the challenges posed by the use of the euro, and in many ways, like what it did to Greece, it has behaved more as a Banana Union.

PS. “We will safeguard your bank system with our risk weighted capital requirements for banks”, as if they the regulators in the Basel Committee really knew what those risks were, is a hubris fed dangerous technocratic besserwisser populism of the worst kind. 

PS. Just in case you are curious, the worst for me at the WO-2018 was to suffer with Egvenia Medvedeva when not winning gold.

Could this be a theme that for some strange reason TED Talks does not like me to talk about?

How long should we allow bank regulators, like the Basel Committee for Banking Supervision and the Financial Stability Board, to feed us their dangerous and hubris filled besserwisser bullshit?

How can any system that makes it easier for those who already have it easier to access bank credit, and harder for those who already find that harder be defined as a “fairer financial system”? https://subprimeregulations.blogspot.com/2016/03/decreed-inequality.html

How can any system that risk weights with 20% the so dangerous AAA rated, and with 150% the so innocous below BB- rated, be defined as a system that fosters financial stability? https://subprimeregulations.blogspot.com/2017/07/what-if-traffic-regulators-to-make-your.html

How can any regulator who does not care about the purpose of what he is regulating hold that he knows what he is doing? “A ship in harbor is safe, but that is not what ships are for”, John A Shedd https://subprimeregulations.blogspot.com/2015/12/our-current-bank-regulatory-tragedy.html

How can any regulator allowing banks to leverage their equity different with different assets and not understanding or caring about how that distorts the allocation of bank credit to the real economy, hold that he knows what he is doing? http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

How many more houses built because its financing is risk weighted 35%, will have its basements occupied by unemployed children, because the risk weight for unrated SMEs and entrepreneurs is 100%? https://subprimeregulations.blogspot.com/2017/11/crimes-against-humanity-can-also-be.html

If knowledge suffices then wisdom is superfluos

The least I seek here is to try to transmit wisdom, since I am too well aware of how correct Hermann Hesse was when in Siddhartha he wrote 'Wisdom is not communicable. The wisdom which a wise man tries to communicate always sounds foolish...Knowledge can be conveyed, but not wisdom."

And much less do I seek to transmit something as a wise man, since I recognize well the impossibility of being one; something clearly summarized by Socrates arguing that the only possible human wisdom is to know oneself not wise, or only possessing wisdom absolutely devoid of value.

But both you and I, perhaps not in our minds, but definitely in our hearts, nonetheless know, or intuit, or want to believe, there is someone who is wiser than other. Where? We do not know, surely not among the besserwisser. Where then? Assuming it has to do with God is a good start.

I say this because in a world with so much information and so much knowledge, time after time we face the dilemma of if knowledge is enough, then wisdom is superfluous and worthless; and I fear that those words contain the danger that we will get bogged down forever in a knowledge dictatorship.

With no doubt our society is being increasingly cornered by producers and worshipers of information and knowledge, who do not leave space enough for questioners to put their information and knowledge in a more correct perspective.

The above occurs in all fields. For example, in the financial area that is the only possible explanation for why our financial regulators so ingenuously assigned so much power of decision over the financial flows to some few and humanly fallible credit rating agencies.

What a pity that nobody read to regulators from the Apology of Plato, where speaking as Socrates says. "Artisans have real knowledge of their arts, but take that to mean that they are most wise with respect to the most important matters”. As I see it this hubris filled petulance spoils all their knowledge. 

And how do we rid ourselves of that knowledge dictatorship without having, like some of our primitives, resort to that remedy worse than the disease that is the cult of dis-information and ignorance? 

That’s not easy, but at least I think we have a better chance of doing so if we can prevent the configuration of incestuous technocratic majorities in our decision-making bodies. Multidisciplinary teams, with great variety of experience and lots of humility, are the ones that should configure our boards and ministries.

I introduce the factor of humility, because one of the main reasons the world is going through current financial turbulence, is because many expert professionals simply did not know, or did not dare to recognize, as Socrates did, that they did not understand anything of what they were approving.

Friends, let us remember that not understanding what happens, not necessarily make us less aware of what is happening.

Translated from “Si el conocimiento basta la sabiduría sobra” published in El Universal