#AI #OpenAI #ChatGPT: Why are business schools silent on bank regulations capital favoring public debt and residential mortgages over loans to businesses?

I asked ChatGPT:

"Taking exception of bankers with a vested interest in lower bank capital requirements, why do business schools keep silence on current risk weighted bank capital/equity requirements, which so much favor public debt and residential mortgages over loans to businesses?"

ChatGPT answered:

"The silence of business schools on current risk-weighted bank capital and equity requirements, which favor public debt and residential mortgages over business loans, could stem from several factors:

1. Curriculum Focus: Business schools often emphasize broader financial theory, strategy, and corporate management, leaving regulatory specifics—like Basel III or risk-weighted capital requirements—largely to specialized finance or banking courses. There may also be a gap between academic theory and evolving industry regulations.

2. Conventional Wisdom: Traditional finance education often leans on the belief that the financial system, particularly through regulations like Basel III, is structured to ensure stability. Schools might avoid critiquing such frameworks because they are considered to provide a safeguard for economic stability, despite their flaws.

3. Complexity and Specialization: The nuances of risk-weighted capital requirements, and how they bias toward government debt and mortgages, require deep expertise in regulatory finance. These topics may not be central to most business school programs unless they specialize in banking or financial regulation.

4. Influence of Public Policy and Government Debt: Governments often play a significant role in setting economic policy, including bank regulations that incentivize public debt. Business schools may avoid critiquing the regulatory preference for public debt due to the sensitive nature of questioning public finance priorities, which align with national interests in borrowing.

5. Industry Ties: Many business schools have close relationships with financial institutions. Since many banks benefit from these capital requirements—especially the ability to hold safer assets like government debt or residential mortgages—there might be an implicit bias not to highlight the flaws of the system that favors such institutions. Critiquing these requirements could indirectly challenge the business models of key financial players who often fund or partner with business schools.

6. Focus on Corporate Strategy: Business schools may prioritize corporate finance over topics related to broader macroeconomic or regulatory critiques. As a result, the debate over the impact of capital requirements on business lending might not be a primary focus in business education.

While some specialized finance courses or programs might address these issues, the overall silence could reflect a blend of institutional inertia, academic focus on other priorities, and complex relationships with the financial industry.

I said: Thanks!

It said: You're welcome! Let me know if you have more questions or need further clarification. Always happy to help!

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

Here my many other questions to ChatGPT – Grok 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.

Professor Joseph E. Stiglitz should be ashamed of himself for arguing racial profiling was a major cause of the 2007/08 subprime mortgage crisis

Nobel Prize winner Joseph E. Stiglitz, in “When Shall We Overcome?” Project Syndicate, March 12, 2018 writes: “America’s financial sector targeted African-Americans for exploitation, especially in the years before the financial crisis, selling them volatile products with high fees that could, and did, explode.” Thousands lost their homes, and in the end, the disparity in wealth, already large, increased even more. One leading bank, Wells Fargo, paid huge fines for charging higher interest rates to African-American and Latino borrowers”

No! America’s financial sector did not target any special community”. It targeted extraordinary returns on equity made possible by the process of securitization teaming up with extremely lousy bank regulations.

1. A part of the financial sector targeted originating and packaging very lousy high interest rate mortgages into AAA rated securities, because that is how you make real big money in the process of securitizing. Packaging an AA rated mortgage into an AAA rated security is not even worth the effort. Packaging a $300.000, 30 year, 11% fixed rate mortgage, and getting an AAA rating on the resulting security, that would allow you to perhaps sell the mortgage as if 6% was a reasonable rate, something which would allow the team to pocket $210.000 in immediate profits.

2. In 2004, bank regulators approved that if those securities had an AAA rating, or if an AAA rated corporation (AIG) had sold a default guarantee on such securities even if it had worse credit ratings, then banks needed to hold only 1.6% in capital, meaning they could leverage 62.5 times with it. If banks thought they could only make 1% in net margin on those securities, then they could expect 62.5% yearly return on equity… and frankly who could resist such a temptation.

Put those two things together and you have 99% of the explanation you need without having to enter into any sort of racial profiling arguments.

Professor Stiglitz having served in 2009 as the chairman of the U.N. Commission on Reforms of the International Monetary and Financial System, where he oversaw suggested proposals and commissioned a report on reforming the international monetary and financial system, should know all that very well, and so he should be ashamed of himself for doing so.

More important than affordable houses for the young, is for them to afford houses.

A letter sent to The Globe and Mail (not published)

The Inter-American Commission of Human Rights (IACHR) has joined UN Rapporteur in recognizing Canadian Human Rights-Based Approach to Housing. When it refers to the creation of safe and affordable housing during the next 10 years for the Canadian population most in need, such as women and children fleeing family violence, seniors, persons with disabilities, those dealing with mental health and addiction issues and veterans, I cannot but concur.

But, it also makes reference to “young adults” and, in this, as a grandfather of two Canadian girls, I must raise my hand to argue that much more important than allowing the young adults affordable housing, is allowing them to afford houses.

Currently, because banks are allowed to leverage more with “safe” residential mortgages than with loans to the “risky” entrepreneurs who stand a better chance to create the future jobs our young need; and banks therefore earn higher risk adjusted returns on equity with mortgages than with loans to entrepreneurs, Canada, like all countries using the Basel Committee’s risk weighted capital requirements for banks, has put the horse before the cart.

PS. Not sent to The Globe and Mail: What would the price of a house be if there was no financing available to purchase these? Of their current price how much is represented by the intrinsic value of the house, and how much is a reflection of all one-way-or-another subsidized financing allocated to that sector? The sad truth is that our society has ended up financing the financing of houses. When all that low risk weighted mortgaging comes home to roost in a subprime unproductive economy, it will be hellish

PS. Chinese money: What’s the problem with Chinese freezing some of their wealth in Canadian real estate? What’s important is what those selling that real estate do with the money. Or not?

Research project: How much in the current house prices can be attributed to the market having priced in all preferential treatments the society has awarded the financing of houses… like the low risk weights in the risk weighted capital requirements for banks?

@PerKurowski