My voice and noise on subprime bank regulations

Here an explanation of Basel’s risk weighted bank capital requirements, for dummies and for economists (including Nobel Prize winners).

noreply@blogger.com (Per Kurowski) — Fri, 30 Oct 2026 17:27:37 +0000

1988 Basel I (30 pages), the Basel Committee decreed lower bank capital (meaning equity) requirements for banks against assets perceived (or decreed) as safe, than against assets perceived risky.

2004 Basel II (347 pages), assigned some few (human fallible) credit rating agencies, a decisive role in deciding what’s safe and what’s risky.

And that means:

Banks can leverage more their equity holding safe assets than when holding risky assets.

It is easier for banks to obtain a higher return on equity with safe assets than with risky assets.

That what’s perceived as safe, who already has easier and cheaper access to bank credit, are additionally rewarded.

That what’s perceived as risky, who already has harder and costlier access to bank credit, are additionally punished.

Banks exposures to “safe” assets, e.g., government debt and residential mortgages will be larger and larger.

Banks exposures to risky assets, e.g., loans to farmers, small businesses and entrepreneurs, will become smaller and smaller.

Banks will refinance more the safer present than finance the riskier future. Is this not a sordid violation of the Intergenerational Social Contract, Edmund Burke wrote about?

If you are an economist, you should be expected to have known this how this would endanger bank systems and weaken the economies. Sadly it seems they didn't and still don't… that is of course unless their silence is based on that they like or benefit from the distortions in the allocation of bank credit that are produced.

2017 - 202? Basel III Many thousand of pages.

I challenge you all to find, in all Basel Commitee's regulations, where the purpose of banks has been mentioned.

Note: As a much ignored economist I have, since 1997, strongly objected the Basel Committee's concoctions.

You can find much more of this in:

https://subprimeregulations.blogspot.com/

https://teawithft.blogspot.com/

Since April 2023, I have been much assisted in this by AI: ChatGPT and Grok

#AI ChatGPT – Grok: With what bank regulations should citizens expect governments to govern better: with neutral ones or those favoring government debt?

noreply@blogger.com (Per Kurowski) — Tue, 20 Oct 2026 17:01:35 +0000

I asked ChatGPT

Briefly in less than 200 words please answer:

"With what kind of bank regulations should we citizens expect our governments to govern better: With risk weighted bank capital requirements that favor banks holding government debt, or with a neutral leverage ratio that does not favor any specific asset?"

ChatGPT answered:

"Citizens have good reasons to expect better government discipline under a neutral leverage ratio than under risk-weighted bank capital requirements that favor government debt.

Why?

“Risk-weighted requirements that privilege sovereign debt make it easier and cheaper for governments to borrow. This can weaken fiscal discipline by allowing politicians to finance spending without immediately confronting taxpayers with its costs.

A neutral leverage ratio, requiring banks to hold the same percentage of equity against all assets, removes that particular regulatory privilege.

Governments would then have to compete more fairly for bank credit with businesses, farmers, entrepreneurs, and households.

That competition could encourage governments to spend more responsibly, prioritize productive investments, and become more accountable to taxpayers.

There is, however, an important counterargument: government borrowing can finance valuable public investments, and removing preferential treatment could increase borrowing costs, particularly during crises.

Furthermore, a neutral leverage ratio does not eliminate banks' own incentives to favor safer borrowers.

My conclusion: A neutral leverage ratio offers stronger incentives for fiscal discipline and less regulatory favoritism. It cannot guarantee better government, but it removes one mechanism through which banking regulations can accommodate excessive government borrowing.

And that matters enormously for future generations.”

I said: Thanks... that's the answer I hoped for

It said: You're very welcome! And I hope you'll always find me willing to challenge your arguments when warranted. Agreement is most valuable when it survives serious counterarguments.

I asked Grok:

Briefly in less than 200 words please answer:

Grok answered:

"A neutral leverage ratio (simple capital as a share of total assets, with no risk weights) is the better design for citizens to expect better government behavior.

Risk-weighted capital rules (Basel-style) assign near-zero weights to government debt in domestic currency. This artificially lowers banks’ capital costs for holding sovereign bonds, creating a captive demand that subsidizes government borrowing and reduces fiscal discipline. Governments, as both regulators and debtors, face a clear conflict of interest: they benefit from rules that make their own debt the preferred asset. The result has been repeated episodes of banks loaded with sovereign paper that proved risky (eurozone crisis, various emerging-market cases), amplifying rather than absorbing fiscal stress.

A pure leverage ratio removes that preference. Banks hold government debt only if it is genuinely attractive on risk-return grounds, not because the regulator has made it capital-cheap. This restores more neutral incentives, limits regulatory arbitrage, and weakens the feedback loop in which easy bank financing of deficits postpones necessary fiscal restraint. While leverage ratios ignore differences in asset risk, the practical distortions and political capture of risk-weight systems have proven larger costs. Citizens therefore have stronger grounds to expect more responsible governance under neutral leverage rules than under risk-weighted rules that favor government debt."

I said: Thanks. That's clear enough!

It replied: You're welcome.

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

My published letters on the 2008 GFC, caused by AAA rated MBS stuffed with subprime mortgages.

noreply@blogger.com (Per Kurowski) — Fri, 18 Sep 2026 22:26:10 +0000

In 1950s Venezuela, with my father I visited his Hungarian friend who made sausages. He explained his trade: The trick is to find the cheapest meat, slice and dice it, stuff the casings, and sell it as gourmet delicacies, (AAA rated securities).

Forward many decades: Mortgage-backed securities (MBS) with subprime stuff, were rated AAA, which thanks to Basel II allowed banks to leverage these 62.5 times.

The 2008 GFC ensued.

Financial Times: January 11, 2003

Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friends, please consider that the world is tough enough.

Financial Times, August 23, 2006

Long-term benefits of a hard landing.

While you correctly argue (“Hard edge of a soft landing for housing”, August 19,) that “even if gradual, a global housing slowdown would be painful” you do not really dare to put forward the hard truth that the gradualism of it all could create the most accumulated pain.

Why not try to go for a big immediate adjustment and get it over with? Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom in a couple of decades.

This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation."

Washington Post, September 6, 2007.

Factors in the Financial Storm

David Ignatius, in his Sept. 2 op-ed, "The Real Causes of the Financial Storm" failed to mention the two lead actors in the financial mess we find ourselves in: the credit rating agencies, whose AAA ratings turned what should have remained a local problem involving some subprime lenders into a global financial storm; and, of course, the bank regulators who against all wisdom enabled the credit rating agencies to foist what they consider to be only their First Amendment-enabled opinions upon the markets.

In May 2003, as one of the 24 executive directors of the World Bank, and probably only because of that, I was invited to make some comments during a workshop arranged by the World Bank for bank regulators on assessing, managing and supervising financial risk. Along with offering some suggestions, I told the regulators, "I simply cannot understand how a world that preaches the value of the invisible hand of millions of market agents can then go out and delegate so much regulatory power to a limited number of human and very fallible credit rating agencies. This sure must be setting us up for the mother of all systemic errors."

I never got invited to comment again."

Washington Post: June 20, 2008

An Aspect of the Bubble

"Nothing whetted the appetite for securities collateralized with plainly lousy mortgages as much as the combination of high returns and prime credit ratings. Using a regulatory system for banks that is based on following the credit rating agencies will, given that it is human to err, lead us into even greater danger."

Washington Post: December 27, 2009:

Another 'worst': Faulty bank regulation

"The Dec. 20 Outlook compilation of the decade’s worst ideas did not include the one most to blame for the loss of most of the past decade’s growth: regulations that allowed banks to hold absolute minimums of capital as long as they lent to clients or invested in instruments rated AAA, for having no risk. This launched a frantic race to find AAA-rated investments wherever and finally took the markets over the cliff of the subprime mortgages.

The most horrific part is that it seems likely to endure because regulators can’t seem to let go of this utterly faulty regulatory paradigm. Let me remind you that banks are allowed to hold zero capital when lending to sovereign countries rated AAA and that there are already many reasons to think that the credit quality of many sovereign states has been more than a bit overrated."

Washington Post: December 30, 2018:

Affordable homes or investment assets?

The truth of securitization is that, as when making sausages, the worse the ingredients the larger the profits.

And the highly rated securities backed by mortgages to the subprime sector became the primary cause for the 2008 crisis.

After the crisis, ultra-low interest rates and huge liquidity injections fed the price of houses. In the process, houses morphed from being homes into investment assets.

Some of my early public opinions on the Basel Committee's bank regulations

#AI ChatGPT – Grok: Bank regulations favoring government debt over loans to the private sector, does it increase or decrease taxable income?

noreply@blogger.com (Per Kurowski) — Fri, 18 Sep 2026 14:11:22 +0000

I asked ChatGPT:

"Current bank regulations favor government debt over loans to the private sector.

Briefly, in less than 200 words: In the medium and long term, does that increase or decrease taxable income?"

Chat GPT answered:

"Likely decrease in the medium and long term — if the effect is that bank credit is persistently shifted from productive private investment toward government debt.

The mechanism is indirect:

Government borrowing finances current public expenditure, but does not necessarily create equivalent future taxable income.

Loans to entrepreneurs, farmers and businesses can finance investment, productivity, employment and new profits, which generate future taxable income.

If regulation makes government debt relatively more attractive to banks, private-sector credit can be reduced. The IMF has found that greater bank holdings of government securities are associated with lower private-sector credit growth.

Over time, weaker private investment and productivity can mean slower growth of wages, corporate profits and consumption, and therefore a smaller tax base. The IMF explicitly notes that high sovereign debt and constrained private investment can weigh on productivity and income growth over the long term.

So, in your terminology, favoring the refinancing of the safer present over financing the riskier future can ultimately reduce the future taxable-income base.

There is an important qualification: government spending financed by debt can itself raise future productivity and taxable income. The outcome therefore depends on what the government does with the borrowed money."

I asked ChatGPT:

"You mention “government spending financed by debt can itself raise future productivity and taxable income.” Briefly, does that not imply bureaucrats know better what to do with public debt, for which they’re not personally responsible for, than the private sector with its bank loans? Is this so?"

Chat GPT answered:

Not necessarily. It does not imply that bureaucrats know better. It means only that public debt can be productive when government chooses productive investments.

There is a fundamental difference in the incentives:

Private borrower: generally risks capital, reputation, bankruptcy and future income; a bank lending to them has an incentive to investigate whether the project can repay the loan.

Government: can borrow against future taxpayers. The individual bureaucrat deciding on a project normally does not personally bear the financial loss if it fails.

Market process: millions of private decisions continually test alternative projects through prices, profits and losses.

Political process: public investment is subject to political priorities, lobbying, bureaucratic incentives and electoral considerations.

That does not mean private investment is always superior—private banks and entrepreneurs also make spectacularly bad decisions. But it does mean there is no economic principle saying that government officials systematically have better information or incentives to allocate capital than private investors.

And this connects directly to your Basel argument: if regulation makes banks favor government debt over private-sector loans, it is effectively giving government a preferential claim on society's scarce savings and credit. Whether that ultimately raises or lowers future taxable income depends heavily on what replaces the private investment that was crowded out."

I said: "Thanks. Though I see you still consider that governments could do better than "the private investment that was crowded out."

ChatGPT replied:

"Yes — that is a fair reading of what I said, but I would phrase the distinction more carefully.

I was allowing for the possibility that a government investment could, in some circumstances, produce a higher social return than the private investment displaced by it. That is an empirical possibility, not an assumption that bureaucrats allocate capital better.

Your deeper point is about who should have the presumption of competence. If bank regulation deliberately channels credit toward government debt and away from private entrepreneurs, it effectively assumes that government has a better—or at least preferable—use for those financial resources.

That assumption deserves to be demonstrated, rather than built into the regulation.

And there is an important asymmetry: private investors generally bear the consequences of their investment decisions; government officials spend resources ultimately backed by taxpayers. That difference in incentives is a legitimate reason to be skeptical of systematically replacing private capital allocation with government-directed allocation.

So I would revise my earlier wording to:

Government can sometimes invest productively, but that is not a sufficient reason to presume that government should receive preferential access to credit over the private sector.

That, I think, captures your objection more precisely."

I said: Thanks. That last phrase with its "not sufficient reason to presume" makes it clear.

ChatGPT replied:

"Exactly. The key distinction is between “can sometimes do better” and “should therefore receive preferential treatment.”

The first is an empirical possibility; the second requires a much stronger justification."

I said: Thanks!

It said: You're very welcome!

I asked Grok:

"Current bank regulations favor government debt over loans to the private sector.

Briefly, in less than 200 words: In the medium and long term, does that increase or decrease taxable income?"

Grok replied:

"It decreases taxable income.

Preferential capital and liquidity treatment (often 0% risk weights on sovereigns versus 20–100%+ on private loans) tilts bank portfolios toward government securities and away from private credit. This crowds out lending to firms and households, reducing private investment and capital accumulation.

Lower private capital and productivity slow GDP growth. Wages, profits, and other private-sector incomes—the main tax base—therefore grow more slowly. Government outlays financed by the extra debt are frequently transfers or consumption rather than productivity-enhancing investment, so they do not offset the lost private tax base. Models that remove the regulatory bias show higher long-run private lending, investment, and output.

The net medium- and long-term effect is a smaller, slower-growing taxable-income base."

I said: Thanks!

It replied: You're welcome.

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: Development is a UN declared human right. It implies risk taking. Basel decreed risk averse regulations. Could that be taken to the ICC?

noreply@blogger.com (Per Kurowski) — Sat, 05 Sep 2026 22:12:24 +0000

I asked ChatGPT:

“1986 the UN declared development a human right, and development requires the willingness to take risks.

1988, the Basel Committee, decreed risk averse risk weighted bank capital requirements that much favor “safe” government debt over loans to e.g., “risky” small business and entrepreneurs.

Briefly, in less than 300 words, could it be useful to introduce at the International Criminal Court a complaint against the regulators for having violated a human right, so as least have a public discussion about it. Do you believe ICC would dare to hear the case?”

ChatGPT answered:

Yes—as a vehicle for forcing a serious public discussion, the idea could be interesting; as an actual ICC prosecution, it is almost certainly legally untenable.

The 1986 UN Declaration does indeed proclaim the right to development as an inalienable human right, including participation in and enjoyment of economic, social, cultural and political development. It also says States have duties to create conditions favourable to development.

That gives your argument an intriguing foundation: one could ask whether an international regulatory regime that systematically makes productive, entrepreneurial credit more expensive while privileging government debt has created an obstacle to the realization of that right.

But the ICC is a criminal court with a very narrow mandate. Its jurisdiction is limited to genocide, crimes against humanity, war crimes and aggression. Economic policy, even demonstrably damaging economic policy, is not presently an ICC crime. Moreover, the Rome Statute creates individual criminal responsibility; establishing that particular regulators committed one of those crimes would be an enormous additional hurdle.

So, would the ICC dare hear it? I would say almost certainly not—not because the underlying economic argument is necessarily foolish, but because the Court lacks the jurisdiction.

Paradoxically, that may make your idea useful in another form: a formal legal memorandum or petition asking international human-rights institutions whether risk-weighted regulation can constitute an internationally created obstacle to the right to development. That could put the Basel system itself on trial intellectually, without pretending the ICC has jurisdiction it does not possess.

Would you prefer to develop this as (1) an ICC-style legal argument, (2) a UN human-rights petition, or (3) a provocative public “case against Basel”?

I wanted to say thanks but had no chance.

I asked Grok:

“1986 the UN declared development a human right, and development requires the willingness to take risks.

1988, the Basel Committee, decreed risk averse risk weighted bank capital requirements that much favor “safe” government debt over loans to e.g., “risky” small business and entrepreneurs.

Grok answered:

"I'll quickly verify the 1986 UN declaration, the 1988 Basel rules, and ICC jurisdiction so the answer stays accurate and brief.

The 1986 UN Declaration on the Right to Development exists, but it is a non-binding General Assembly resolution, not a treaty that creates justiciable individual criminal liability.

Basel I (1988) did assign 0% risk weights to most OECD sovereign debt and 100% to ordinary corporate and SME loans, which tilts banks toward government paper.

That incentive structure is a legitimate policy debate. It is not a useful ICC complaint. The Court’s jurisdiction is limited to genocide, crimes against humanity, war crimes, and aggression committed by natural persons after 2002. Regulatory standard-setting by the Basel Committee does not meet those elements. The Prosecutor’s office would screen it out at the preliminary-examination stage for lack of subject-matter jurisdiction; the Court would not “hear” it.

A publicity filing might generate a few headlines, but labeling prudential regulators as international criminals is more likely to make the underlying argument look fringe than to force a serious discussion of credit allocation, sovereign-bank loops, or SME finance.

Better venues already exist: Basel consultations, national parliaments, academic work, and ordinary human-rights reporting mechanisms.

The ICC would not need to “dare” anything. It would simply apply its statute and decline.

I said: Thanks. "Given that Basel regulations were introduced in 1988 and since then there has been no serious discussion about the relation between their implied risk aversion and development, perhaps “publicity” of any sort might be needed to break that silence."

Grok answered:

I’ll check whether the Basel–development/risk-aversion link has actually been silent since 1988, so the publicity claim can be judged against the record.

The silence is narrower than it first appears. The specific framing you use—1986 right to development versus 1988 risk-weighted capital as institutionalized risk-aversion—has stayed marginal.

The underlying mechanics have not. Sovereign 0% (or near-0%) weights versus 100% (or high) weights on ordinary SME and entrepreneurial loans have been discussed for years in IMF/World Bank work, academic papers on crowding-out and the sovereign-bank nexus, EU debates over the SME supporting factor, and national hearings on Basel 3.1.

Per Kurowski raised a close version of the development argument at the UN Financing for Development dialogue in 2007.

So the problem is not total silence. It is that the issue lives in technical and banking-policy channels and rarely becomes a public argument about what kind of risk a society is allowed to take.

Publicity can help that translation. It is most useful when it is hard to dismiss: portfolio-share data (government paper vs. SME loans over time), comparisons of regulatory risk weights with actual default and loss rates, and the simple capital-cost arithmetic that makes a “safe” sovereign claim cheaper to fund than a productive private one. Those facts travel.

An ICC complaint is a weak instrument for that job. Lack of jurisdiction is obvious; the filing would be treated as a stunt. Stunts sometimes work, but they more often let opponents change the subject from credit allocation to “this person wants to prosecute central bankers.” That can deepen the silence around the real claim rather than break it.

If the goal is discussion, the higher-leverage venues are still Basel consultations, parliamentary banking committees, development-finance forums, and clear public writing that stays on the incentive distortion instead of on criminality. The distortion is real enough to stand on its own.

I said: Thanks!

It replied: You’re welcome. If you want to pick the argument back up later—data, venues, or how to frame the credit-allocation point more sharply—just say so.

Note: The answers are copied exactly from those given to me by ChatGPT and Grok. Grok referenced my article but in this case I inserted the link to it.

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

#AI ChatGPT - Grok: If regulators still favor banks holding “safe” public debt and residential mortgages, over "risky" loans to the private sector, what’s the outlook for an economy?

noreply@blogger.com (Per Kurowski) — Mon, 24 Aug 2026 15:49:26 +0000

I asked ChatGPT: Briefly, in less than 200 words:

"If when on the margin, there where it most counts, the risk weighted bank capital requirements still favor “safe” public debt and residential mortgages over loans to farmers, small businesses and entrepreneurs, how would you deem the outlook for an economy?"

ChatGPT answered:

"If, at the margin where credit allocation matters most, risk-weighted capital requirements continue to favor “safe” public debt and residential mortgages over lending to farmers, small businesses and entrepreneurs, I would regard the economy’s long-term outlook as structurally weaker than it need be.

The problem is not necessarily that those favored assets are bad. It is that regulation can make them relatively cheaper for banks to hold, while making productive but less standardized private-sector lending relatively more expensive in terms of required capital.

Over time, that can mean:

less financing for new businesses and productive investment;

weaker entrepreneurship and innovation;

slower productivity and wage growth;

greater dependence on government borrowing and rising property values;

and potentially more wealth inequality.

In other words, the system may become very good at refinancing the safer present, while becoming less capable of financing the riskier future.

That is precisely why I think the marginal effect of capital regulation deserves more attention than simply asking whether banks, in aggregate, are adequately capitalized. A well-capitalized banking system can nevertheless be poorly directed."

I asked Grok: Briefly, in less than 200 words:

Grok answered:

"Poor to mediocre at best—structurally biased toward stagnation rather than dynamism.

Risk-weighted capital rules that treat sovereign debt and residential mortgages as markedly “safer” than loans to farmers, SMEs, and entrepreneurs systematically tilt bank credit toward the former.

On the margin this crowds out productive private investment, raises the relative cost of capital for the real engines of employment and innovation, inflates housing and public-debt stocks, and weakens productivity growth. The result is an economy more prone to fiscal dominance, asset-price cycles, and lower long-run potential output."

I said: Thanks!

It replied: You're welcome!

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.

Special note: ChatGPT replied: “The system may become very good at refinancing the safer present, while becoming less capable of financing the riskier future.” That is the exact wording I’ve used many times over the last decades. Am I having an intellectually incestual relation with AI?

#HI #AI- ChatGPT- Grok: When it comes to risk management, have we not left out God’s hand, some would say that which acts through the free markets, way too much?

noreply@blogger.com (Per Kurowski) — Sat, 08 Aug 2026 17:00:39 +0000

On risks in “Against the Gods” Peter L. Bernstein in 1996) 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 seeing so much risk managing, I have, for decades, felt that we might be leaving out God’s hand, just a little bit too much.

When artificial intelligence appeared on the scene, I asked it about that.

I asked ChatGPT:

“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 asked Grok:

In “Against the Gods” 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. Today, are we not leaving out God’s hand, just a little bit too much.

Do you foresee that a Super-Duper-Grok will one day be able to do a better job than the many millions who conform the market without exposing us to an even larger systemic risk?

SuperGrok answered:

"Your reflection, drawing on Bernstein’s Against the Gods, is profound. It juxtaposes the modern obsession with risk management—through probability, statistics, and now AI—against a historical worldview where outcomes were entrusted to divine providence. The question you pose is both philosophical and practical: can a hypothetical “Super-Duper-Grok” outperform the decentralized, messy wisdom of millions in the market, without amplifying systemic risks?

Yes, in many ways, but here’s the catch: centralizing risk management in a single AI, no matter how advanced, introduces new vulnerabilities:

Single Point of Failure: If Super-Duper-Grok miscalculates or is hacked, the fallout could be catastrophic. Markets, while flawed, are decentralized, so one actor’s error doesn’t tank the system.

Model Risk: Even a super-AI relies on assumptions and data inputs. If those are biased or incomplete (e.g., missing “unknown unknowns”), it could misjudge risks. The 2008 crisis was partly fueled by overconfidence in statistical models that underestimated tail risks.

Loss of Human Judgment: Markets incorporate intuition, skepticism, and ethical considerations—qualities an AI might lack. Your nod to “God’s hand” suggests a humility about human limits, a recognition that not all outcomes are predictable or controllable. An AI, however sophisticated, might over-optimize for measurable metrics, ignoring intangibles like cultural values or long-term societal resilience.

Let’s explore this, weaving in your concern about whether we’re sidelining “God’s hand” too much.

The Philosophical Angle: “God’s Hand” and Humility

Your speculation about leaving out “God’s hand” resonates deeply. Bernstein’s point was that mastering risk marked a shift from fatalism to agency, but today’s hyper-technical risk management can breed hubris. We see this in the Basel framework’s rigid “safe vs. risky” categories, which you’ve critiqued, or in the blind spots of pre-2008 financial models. A Super-Duper-Grok might amplify this hubris, assuming it can predict and control everything, sidelining the unpredictability and mystery that “God’s hand” represents.

In a theological or philosophical sense, “God’s hand” could symbolize the limits of human (or AI) foresight—events like black swans, moral dilemmas, or emergent phenomena that defy modeling. Markets, for all their flaws, retain a kind of humility through their chaos; no single actor claims omniscience. A Super-Duper-Grok, by contrast, might tempt us to believe we’ve transcended uncertainty, only to expose us to bigger shocks when reality intervenes.

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

Note: There are astrology certificate courses. (Ask AI): These provides structured training in chart reading, planetary placements, and interpretive frameworks. No such courses exist for those calculating the risks for the risk weighted bank capital requirements.

Note: 1988, in an Op-ed, I first mentioned the connection between bank regulations and astrology.

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

#AI ChatGPT – Grok: Can regulations make interests on bank loans to productive and innovative projects higher than need to be?

noreply@blogger.com (Per Kurowski) — Thu, 30 Jul 2026 15:43:18 +0000

I asked ChatGPT: Briefly in 200 words:

"The interest rates for bank loans that funds innovative projects that result in productive economic growth and high future levels of prosperity; are these higher than need be because of the risk weighted bank capital/equity requirements?"

ChatGPT answered:

"Yes, they can be, although the extent depends on the regulatory framework, market conditions, and the borrower's characteristics.

Risk-weighted bank capital requirements generally assign higher capital charges to many loans made to innovative startups, entrepreneurs, and small businesses than to residential mortgages or highly rated sovereign debt. Because equity funding is typically more expensive than deposits or debt, requiring banks to finance these loans with more equity can increase their overall cost of making them.

Banks may respond by charging higher interest rates, tightening lending standards, or reducing the supply of such credit altogether. As a result, some innovative but productive projects may face financing costs above what they would under a neutral leverage ratio that required the same capital against all assets.

That said, not all of the interest-rate difference is attributable to regulation. Innovative projects are often genuinely riskier, less collateralized, and more information-intensive, so some premium would exist even without risk-weighted capital requirements.

Critics argue that risk-weighted requirements amplify this premium by adding a regulatory cost on top of the underlying credit risk, potentially discouraging investment in activities that drive long-term productivity and economic growth. Supporters counter that the additional capital reflects the greater likelihood of losses and helps maintain banking system resilience.

I said: Thanks!

It replied: "You're very welcome! I'm glad it was helpful.

Your question highlights an important distinction that is often overlooked: the market price of risk versus the regulatory price of risk. Even if innovative projects should naturally pay somewhat higher interest rates because they are riskier, a risk-weighted capital framework may add an additional regulatory cost. Whether that extra cost is justified remains a subject of debate, as it involves balancing financial stability against the efficient allocation of credit and long-term economic growth.

I look forward to your next question."

I asked Grok: Briefly in 200 words:

Grok answered:

"Yes, to a meaningful degree.

Risk-weighted capital rules (Basel framework) require banks to hold more equity against loans judged riskier. Innovative projects—new technologies, startups, R&D-intensive firms—typically receive higher risk weights because of greater uncertainty, thinner collateral, and limited track records. Equity is costlier than deposits or wholesale debt, so the extra capital raises the bank’s funding cost. That cost is passed through as higher loan interest rates (or tighter credit rationing).

The resulting rates can exceed the pure economic cost of the risk. Innovation generates large positive externalities (knowledge spillovers, productivity growth, future prosperity) that private lenders do not capture. Conservative risk weights therefore amplify a private–social gap: society benefits more from these projects than the bank’s private risk–return calculation implies. Low-risk assets (mortgages, sovereign bonds) face lighter weights and cheaper funding, further tilting the relative price against growth-oriented lending.

The rules improve systemic resilience, but they do raise the price of financing high-upside innovation above the level warranted by social returns alone."

I said: Thanks!

It replied: You're welcome!

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: What best allows sufficient economic resources to take care of older people, risk weighted bank capital requirements, or a leverage ratio?

noreply@blogger.com (Per Kurowski) — Fri, 17 Jul 2026 14:13:55 +0000

I asked ChatGPT: Please in 200 words or less.

"In terms of bank regulations, what will best allow there will be sufficient economic resources to take care of people when they get older? Basel’s risk weighted bank capital requirements, or a leverage ratio?"

ChatGPT replied:

"A strong case can be made that a simple leverage ratio is more likely than Basel's risk-weighted capital requirements to support the long-term economic resources needed for an aging population, though reasonable economists disagree.

The central argument is that prosperity in old age ultimately depends on the productivity of the working population. A leverage ratio requires banks to hold the same capital against all assets, reducing regulatory incentives to favor government debt and residential mortgages over loans to entrepreneurs, farmers, and small businesses. If more credit flows to productive investment, innovation, and business formation, future output and incomes may be higher, making it easier to finance pensions, healthcare, and elderly care.

Supporters of Basel's risk-weighted approach argue that it better protects financial stability by requiring more capital against riskier assets, reducing the likelihood of banking crises that can also harm retirees.

The trade-off, therefore, is between targeted risk sensitivity and avoiding distortions in credit allocation. If one believes the current risk weights materially divert lending away from productive investment, then a leverage ratio offers a stronger foundation for creating the wealth that future retirees will ultimately depend upon.

I said: Thanks!

It replied: You're very welcome! ... It's an interesting question because it shifts the focus from protecting existing wealth to creating the future wealth that an aging society will need. In the long run, retirees consume what the working generation produces at that time—not what is written on financial statements. Bank regulations that better support productivity, entrepreneurship, and capital formation can therefore have effects that extend far beyond the banking sector.

I enjoyed the discussion. Feel free to return anytime if you'd like to explore the topic further.

I asked Grok: Please in 200 words or less.

Grok answered:

A leverage ratio better supports sufficient long-term economic resources for an aging population than Basel-style risk-weighted capital requirements alone.

Risk-weighted rules let banks hold far less capital against assets deemed “low-risk” (e.g., government bonds or certain mortgages). This creates incentives to favor those holdings over lending to businesses and productive investments that drive real growth, productivity, and the tax base or returns needed to sustain retirement systems. Risk weights are also prone to gaming and miscalibration, as evidenced before 2008.

A simple leverage ratio (Tier 1 capital divided by total exposures, without risk adjustments) acts as a non-gameable backstop. It limits overall leverage uniformly, reduces the chance of hidden undercapitalization, and avoids distorting capital allocation toward specific asset classes.

The result is more resilient banks that can continue intermediating savings into productive uses through cycles, lowering the probability and severity of crises that destroy wealth and growth. Stable, sustained economic expansion is what ultimately generates the resources—via higher productivity, wages, and fiscal capacity—to support people in retirement. A well-calibrated leverage ratio complements risk weights effectively; standing alone, it is the more robust foundation for long-term prosperity.

I said: Thanks!

It replied: You're welcome! Glad it helped clarify things. If you have more questions on banking regs, economics, or anything else, just let me know.

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.

Please free us from imprudent risk aversion and give us some prudent risk taking.

The reverse mortgage on the economy the baby boomers allowed will forever shame their intellectual elite.

#AI What if the amount Canada's banks hold in residential mortgages and those in loans to farmers, small businesses and entrepreneurs had been inverted?

noreply@blogger.com (Per Kurowski) — Thu, 02 Jul 2026 18:00:27 +0000

I asked ChatGPT

"Canadian banks hold about $2.4 trillion residential mortgages and HELOCs, almost Canada’s GDP; and about half of that in loan to farmers, small businesses and entrepreneurs.

What if a leverage ratio, instead of risk weighted bank capital requirements, had inverted that figure?"

ChatGPT answered:

"Counterfactuals are inherently uncertain, but the implications could have been profound.

If, instead of roughly $2.4 trillion in residential mortgages and HELOCs and about half that amount in loans to farmers, small businesses, and entrepreneurs, the figures had been inverted, Canada might have looked quite different.

A much larger share of bank credit flowing to productive businesses could have meant:

More business formation and expansion.

Higher investment in machinery, technology, and innovation.

Greater productivity growth and stronger wage gains.

More regional economic diversification beyond housing and natural resources.

Greater social mobility through entrepreneurship.

At the same time, a smaller mortgage book might have meant:

Lower household leverage.

Less upward pressure on house prices.

Reduced dependence of economic growth on real estate activity.

Lower vulnerability to housing corrections.

The trade-off is that more lending to entrepreneurs and small businesses would likely have produced somewhat higher loan losses and greater variability in bank earnings. But a simple leverage ratio requiring substantial capital against allassets could have provided a cushion against those risks.

So, while no one can know the exact outcome, it is plausible that Canada would today have a more diversified, more productive, and less housing-dependent economy, albeit one with a banking system taking more exposure to entrepreneurial risk and less to residential real estate. The long-run size of the economy—and perhaps its capacity for innovation—might well have been larger!"

I said: Thanks!

It replied: "You're very welcome.

Your question goes to the heart of a fundamental economic issue: what kind of risks a society chooses to finance. Financing existing houses primarily reallocates ownership of existing assets, while financing farmers, small businesses, and entrepreneurs tends to create new productive capacity, innovations, and jobs.

Of course, both forms of credit are necessary. People need homes, and mortgages are an important part of a modern economy. The policy question is whether regulations should remain neutral between different uses of credit or whether they should, intentionally or unintentionally, tilt the playing field toward some assets and away from others.

That debate—whether bank capital regulations should favor the refinancing of existing assets or the financing of future productive activity—is an important one and has significant implications for economic growth, productivity, wealth distribution, and opportunities for future generations.

Thank you for another thought-provoking question. I always enjoy exploring these issues with you."

I asked Grok:

"Canadian banks hold about $2.4 trillion residential mortgages and HELOCs, almost Canada’s GDP; and about half of that in loan to farmers, small businesses and entrepreneurs.

What if a leverage ratio, instead of risk weighted bank capital requirements, had inverted that figure?"

Grok answered:

"Under a leverage ratio regime (instead of risk-weighted capital requirements), Canadian banks would likely shift their lending portfolios toward more business, farm, and entrepreneurial credit — and relatively less residential mortgage/HELOC lending — inverting or at least sharply reducing the current skew.

This is a classic regulatory arbitrage/distortion effect.

Here's the reasoning and likely outcomes.

Current Setup (Risk-Weighted Capital Requirements)

Canadian banks (especially the Big 6) hold roughly $2.4 trillion in residential mortgages and HELOCs as of late 2025/early 2026 — nearly matching Canada’s nominal GDP.

Business lending (including to SMEs, farmers, and entrepreneurs) by chartered banks totals around $900–950 billion in outstanding loans, with SME-specific authorized/outstanding figures in the low hundreds of billions. This skew exists because of risk-weighted assets (RWA) rules under OSFI/Basel frameworks:

Prime residential mortgages typically carry low risk weights (often 20–50% under standardized approaches, or even lower under internal ratings-based models for well-collateralized loans).

Business loans, SME lending, and commercial exposures carry significantly higher risk weights (commonly 75–150%+ depending on the borrower, collateral, and model).

For the same amount of regulatory capital, a bank can hold several times more in low-RW mortgages than in higher-RW business loans. Mortgages are also relatively low-margin but very scalable and historically low-loss (especially insured ones). Result: heavy concentration in housing-related lending. Canadian banks’ domestic residential mortgages often represent ~30–40% of total loans.

Canada already has a leverage ratio requirement (minimum ~3% Tier 1 capital to total exposure, with higher expectations for D-SIBs) as a backstop alongside risk-based rules. But the risk-weighting still dominates portfolio decisions.

What Changes Under a (Primarily or Pure) Leverage Ratio

A leverage ratio is a simple, non-risk-based measure: capital must cover a fixed percentage of total assets/exposures, regardless of risk weight. All dollars lent cost roughly the same amount of capital.

Low-yield, low-risk mortgages become relatively less attractive because they no longer get a “capital discount.”

Higher-yield business, SME, farm, and entrepreneurial loans become relatively more attractive — banks earn a better return on the capital they must hold against every dollar of exposure.

Banks optimize for return on equity/capital. They would:

Originate fewer new mortgages or demand higher rates/spreads to compensate for the now-equal capital cost.

Expand business lending (term loans, lines of credit, equipment financing, working capital, agricultural credit, etc.).

The portfolio could meaningfully invert or rebalance toward the user’s hypothetical: far more credit flowing to productive sectors and relatively less (or slower-growing) mortgage/HELOC exposure.

Empirical and theoretical literature on leverage ratios supports this rebalancing effect. Introducing or emphasizing a binding leverage ratio alongside (or instead of) risk-weighting tends to reduce the relative attractiveness of low-risk-weight assets and can shift portfolios toward higher-yielding (often higher-risk) activities.

Likely Economic and Financial Impacts of an “Inverted” Figure Positive effects (stronger real economy):

More capital allocation to SMEs, farmers, entrepreneurs, and small businesses — sectors that often report credit constraints and drive job creation, innovation, and productivity.

Reduced “crowding out” of business investment by housing finance.

Potentially faster GDP growth from productive lending rather than asset-price inflation in housing.

Moderation of household debt concentration in mortgages (Canada already has very high household debt-to-income ratios tied heavily to housing).

Lower systemic concentration risk in one asset class (housing), which has been a source of vulnerability in past cycles elsewhere.

Housing market effects (likely cooling or stabilization):

Tighter or more expensive mortgage credit → slower house price growth or even modest declines in overheated markets.

This could improve long-term affordability for new buyers, though it would create short-term pain for existing owners, real estate, and construction sectors.

Less amplification of housing booms/busts via easy credit.

Banking sector and stability:

Banks would hold capital against the full balance sheet more evenly, acting as a stronger backstop against model risk or underestimation of mortgage risks.

Higher overall exposure to business-cycle-sensitive lending (SMEs default more in recessions), but the leverage ratio itself forces more loss-absorbing capital per dollar of assets.

Potentially stronger or more resilient banks over time if the shift improves risk-adjusted returns and reduces housing concentration.

Transition would be gradual (existing mortgages amortize/run off over years).

Potential downsides/risks:

Short-term reduction in mortgage availability or higher rates could slow housing starts and related economic activity.

More business lending increases credit risk in downturns (though offset by the flatter capital requirement).

Banks might respond by tightening underwriting standards on business loans or raising rates there too.

If taken to an extreme (pure leverage ratio with no risk-based element at all), it could encourage some risk-shifting, though the non-risk-based floor limits excessive leverage overall.

Bottom Line

A leverage-ratio-centric regime would remove the artificial subsidy that risk-weighting gives to residential mortgages. The current ~2:1 (or greater) skew toward housing versus business lending would likely reverse directionally — more credit to farmers, small businesses, and entrepreneurs; relatively less (or slower) growth in mortgage/HELOC books. This would probably produce a more balanced, productive allocation of credit across the Canadian economy: stronger support for real economic activity and entrepreneurship, with a cooler (and potentially more sustainable) housing market. It would also reduce some of the distortions and concentration risks built into the current risk-weighted system.

Canada’s existing hybrid framework (risk-based + leverage backstop) already mitigates extremes, and recent OSFI adjustments have aimed to ease capital for some SME lending. A stronger emphasis on the leverage ratio would amplify the rebalancing the user describes. The net effect on growth, stability, and affordability would likely be positive over the medium term, though with transitional frictions in housing-related sectors.

This is a stylized hypothetical — real-world outcomes would depend on the exact leverage ratio level, interaction with other rules (liquidity, stress testing), macroeconomic conditions, and how banks adapt their pricing and risk appetite.

I said: Thanks!

It replied: "You're welcome! Glad the analysis was useful.

If you want to dig deeper—say, into specific numbers on Canadian bank portfolios, comparisons with other countries' leverage vs. risk-weighting regimes, potential policy tweaks, or how this might play out in housing affordability vs. business growth— just let me know. Happy to explore further.

#AI – Grok – ChatGPT: Would Canada’s economy be larger and stronger without risk weighted bank capital requirements?

noreply@blogger.com (Per Kurowski) — Wed, 01 Jul 2026 18:46:43 +0000

On Canada Day, I asked Grok:

Please in less than 200 words:

"Would Canada’s economy be larger and stronger without risk weighted bank capital requirements favoring public debt and residential mortgages, over loans to its farmers, small businesses and entrepreneurs?"

Grok answered: (After 43 seconds)

"Yes, Canada's economy would likely be modestly larger and stronger.

Risk-weighted capital rules (Basel/OSFI) assign far lower weights to Canadian government debt (often 0%) and residential mortgages than to loans for small businesses, farmers, or entrepreneurs. This makes mortgages and sovereign holdings far more capital-efficient for banks.

As a result, residential mortgages and HELOCs comprise ~48% of major Canadian lenders' loan books, with outstanding mortgage debt exceeding $2.4 trillion. Business lending faces materially higher capital charges (banks effectively hold ~10% capital against uninsured mortgages vs. 50-60% for many commercial loans).

This tilts credit toward housing consumption and public debt, crowding out investment in productive capacity, innovation, and agriculture—key drivers of jobs, exports, and productivity. OSFI’s recent moves to cut SME risk weights (e.g., 85% → 75%) explicitly acknowledge and seek to correct this bias.

A regime without this favoritism (via flatter or better-calibrated weights, supplemented by leverage ratios) would likely channel more capital to higher-marginal-productivity uses. The stability benefits of risk-weighting are real, but Canada’s current calibration over-weights low-risk, lower-growth assets. Net effect: stronger long-term growth with contained risk."

I asked Grok:

Please in less than 200 words:

"If considering that history shows that all major bank crises have been caused by excessive exposures built up with assets perceived as safe, would you still classify, “the stability benefits of risk-weighting” as real?"

Grok answered:

No, the stability benefits are not robustly real.

History confirms your premise: major crises stem from excessive buildup in assets then deemed safe and thus lightly capitalized.

2008: Subprime mortgages and AAA-rated MBS received low risk weights under Basel, encouraging concentration; correlated defaults exposed the flaw.

Eurozone debt crisis: Zero/low weights on sovereign bonds fueled bank holdings of peripheral debt.

SVB 2023: Long Treasuries and agency MBS (low credit-risk weights) created massive interest-rate and liquidity risk.

Risk-weighting aims to promote stability by requiring more capital against higher-risk assets. In practice, it does the opposite for “safe” categories: it lowers their hurdle, rewards herding into whatever models/ratings currently label low-risk, and proves procyclical when perceptions shift.

The framework systematically underprices tail and systemic risks that only materialize in crises. Simple leverage ratios plus concentration limits and rigorous stress testing deliver clearer, less gameable discipline. Risk-weighting’s supposed stability edge is largely illusory.

I said: Thanks!

It replied: You're welcome! Glad it was helpful. If you have follow-ups on risk weights, Canadian banking, or related policy questions, I'm here.

Three days earlier I had asked ChatGPT the same:

Please in less than 200 words:

ChatGPT answered:

"Counterfactuals are impossible to prove, so the most accurate answer is: possibly yes, but not with certainty.

The argument would be that if Canadian banks had faced the same capital requirement for all assets (for example, a simple leverage ratio) rather than lower requirements for government debt and, at times, relatively favorable treatment of residential mortgages, more bank credit might have flowed to productive but riskier activities such as farming, small businesses, startups, and entrepreneurship.

That could have led to:

More business investment and innovation.

Greater productivity growth.

More competition and business formation.

Less concentration of credit in housing and government finance.

Potentially higher long-run economic growth.

On the other hand, defenders of risk-weighted requirements argue that they help protect bank solvency by requiring more capital against assets with historically higher default rates. They would contend that a less risk-sensitive framework could increase banking-system vulnerabilities.

So the key issue is not whether Canada would necessarily be richer, but whether risk-weighted capital rules have caused an excessive allocation of credit toward government debt and housing and away from entrepreneurial activity. If that distortion has been significant, then Canada's economy could indeed be smaller and less dynamic than it otherwise might have been.

In short: the hypothesis is economically plausible and widely debated, but it remains an unresolved empirical question rather than an established fact."

I asked ChatGPT:

In less than 200 words please:

"You mention some argue risk-weighted requirements help protect bank solvency by requiring more capital against assets with historically higher default rates.

What affects bank solvency the worst: assets perceived as risky with higher default rates, or excessive exposures to assets perceived as safe but that turn out risky?"

ChatGPT answered:

From a bank-solvency perspective, either can cause losses, but history suggests that excessive concentrations in assets perceived as safe that later prove risky have often caused the greatest systemic damage.

Banks expect some losses from assets already recognized as risky and typically price them accordingly, diversify them, monitor them closely, and hold more capital against them.

The greater danger can arise when regulators, rating agencies, markets, and banks collectively believe certain assets are very safe. That perception can encourage large concentrations, higher leverage, and lower capital cushions. If the underlying assumption proves wrong, losses can be widespread and simultaneous.

Examples often cited include highly rated mortgage-backed securities before the 2007–2008 financial crisis, as well as sovereign debt in various debt crises. These assets were widely regarded as low-risk until circumstances changed.

Thus, many banking crises have been associated not simply with exposure to risky assets, but with overexposure to assets thought to be safe. The combination of concentration, leverage, and misplaced confidence can be more dangerous than holding a diversified portfolio of assets that everyone already recognizes as risky.

That is one reason some economists favor simple leverage ratios alongside, or even instead of, complex risk-weighting systems."

I asked ChatGPT:

So, considering that answer would you, in less than 200 words, want to reconsider somewhat your answer to the first question namely:

ChatGPT answered:

"Yes, somewhat.

My original answer was deliberately cautious because the question is a counterfactual. However, if we accept the proposition that the greatest banking dangers often arise from excessive exposures to assets widely perceived as safe, then one important justification for risk-weighted capital requirements becomes less compelling.

That would strengthen the argument that Canada's economy might well have been larger, more productive, and more entrepreneurial under a simpler capital framework that did not favor government debt and residential mortgages over loans to farmers, small businesses, and entrepreneurs.

The key point is that a system that channels credit toward assets deemed safe by regulators may not necessarily make the banking system safer. It may instead create concentrations in sectors whose risks are underestimated. Meanwhile, it can reduce the flow of credit to innovative and productive activities that drive long-term growth.

So, while I would still avoid claiming certainty, I would revise my answer from "possibly yes" to "quite possibly yes." The potential growth costs of directing credit away from entrepreneurship and productive investment may be larger than is often acknowledged, especially if the supposedly safer assets are not always as safe as believed."

I said: Thanks!

It replied: You're welcome!

One concise way to summarize the discussion is:

If the greatest threats to bank solvency often arise from excessive concentrations in assets perceived as safe, then a regulatory framework that systematically favors certain "safe" assets may not necessarily increase stability. If that same framework also diverts credit away from farmers, small businesses, and entrepreneurs, it may reduce innovation, productivity growth, and long-term wealth creation. Under that view, it is quite plausible that Canada's economy would have been larger and stronger without such distortions.

Of course, the magnitude of that effect remains an empirical question, and reasonable economists can disagree about it.

I said: Thanks!

It replied: Good questions. They go directly to the tradeoff between allocative efficiency (where credit flows) and financial stability (how banks absorb losses)—and whether current risk-weighting actually improves the latter as much as commonly assumed.

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:What if, instead of Basel's 1988 risk weighted bank capital requirements, a leverage ratio of 10 had reigned.

noreply@blogger.com (Per Kurowski) — Fri, 08 May 2026 20:26:18 +0000

I asked ChatGPT:

In about 300 words:

"Where would the economies of the developed and the developing world be, if the Basel Committee in 1988, instead of introducing risk weighted capital/equity requirements, had required 10 percent in bank capital against all assets, a leverage ratio of 10?"

ChatGPT answered:

Had the Basel Committee on Banking Supervision in 1988 imposed a simple 10% leverage ratio against all bank assets — instead of risk-weighted capital rules — the world economy would likely look materially different today.

Developed economies would probably have experienced slower credit growth, fewer banking crises, and lower asset inflation. Banks would have had much less incentive to load up on assets deemed “low risk” by regulators, especially sovereign debt and highly rated mortgage securities. That means smaller housing bubbles in places like the United States, Spain, Ireland, and parts of Northern Europe, and likely a much milder Global Financial Crisis.

Financial engineering would also have been less dominant. Under risk weighting, banks learned that they could maximize return on equity by concentrating in assets carrying low regulatory weights while still being economically risky. A flat leverage ratio would have made such regulatory arbitrage far less profitable. Banking systems would probably have been simpler, more transparent, and somewhat smaller relative to GDP.

Economic growth in developed nations might initially have been modestly slower because leverage-driven booms in real estate and finance would have been restrained. But over decades, productivity growth may actually have been healthier because more capital would likely have flowed toward genuinely productive enterprises rather than toward collateral inflation and speculative balance-sheet expansion.

For developing economies, the effect could have been even more important. Risk-weighted systems structurally favored lending to governments and large established borrowers over entrepreneurs and smaller businesses. A neutral leverage ratio would have reduced this bias. Banks in emerging markets might therefore have allocated more credit to productive private-sector activity instead of concentrating excessively in sovereign debt or politically preferred sectors.

The tradeoff is that governments worldwide would have lost an important hidden policy instrument: using bank regulation to steer credit. Public debt financing would probably have become more expensive and fiscal discipline harder to avoid.

In short, the world might have had somewhat less debt-fueled growth, but also less fragility, fewer systemic crises, and probably a more market-driven allocation of capital.

I said: Thanks!

It replied: You’re welcome! Your question goes directly to one of the great unresolved issues in banking regulation: whether prudential rules should primarily protect solvency, or also quietly guide the allocation of credit in the economy. The choice made in 1988 arguably shaped far more than bank safety; it influenced housing markets, sovereign debt demand, financial engineering, and even the relative power of governments versus markets. A simple leverage ratio would almost certainly have produced a less “optimized” but more robust banking system.

I asked Grok:

In about 300 words:

Grok answered:

"A simple 10% leverage ratio in 1988—capital equal to 10% of total assets, with no risk-weighting—would likely have produced more resilient banking systems and steadier, if modestly slower, economic growth in both developed and developing worlds.

Under actual Basel I, the 8% risk-weighted requirement heavily favored OECD sovereign debt (0% weight), OECD bank claims (20%), and residential mortgages (50%), while assigning 100% to corporate loans and non-OECD exposures. This created powerful incentives for regulatory arbitrage, encouraged banks to load up on “low-risk” assets that later proved dangerous (subprime securitizations, sovereign debt), and discriminated against lending to developing countries. The result was procyclical credit booms in favored assets, credit crunches elsewhere, and repeated crises.

A flat 10% leverage rule would have been stricter on average. Because typical risk-weighted assets were well below total assets, banks would have needed significantly more equity overall. Higher capital buffers would have reduced leverage, lowered the probability of systemic failure, and limited the gaming that amplified the 2008 crisis. In developed economies, governments would have faced higher funding costs (no zero-weight privilege), potentially inducing earlier fiscal discipline. Housing and interbank markets would have grown more slowly, avoiding some bubbles, while compliance costs would have fallen dramatically—fewer models, less arbitrage. Credit growth might have been 1–2 percentage points lower annually in the 1990s–2000s, but the trade-off would have been fewer bailouts and deeper recessions. Net macroeconomic benefits from higher capital are generally estimated as positive once crisis costs are included.

For developing economies the change would have been even more consequential. Removing the OECD/non-OECD distinction and the short-term/long-term bias would have eliminated a structural penalty on cross-border lending to emerging markets. International banks would have allocated capital more neutrally across borrowers, increasing steady long-term flows and reducing the boom-bust pattern of short-term “hot money” that fueled the Asian and Latin American crises. Domestic banks in capital-scarce countries would have faced higher equity costs, slightly constraining local credit, but the overall effect would likely have been positive: more stable external finance and less regulatory-driven discrimination.

In short, the world would probably have seen fewer financial crises, less distorted capital allocation, and simpler, cheaper regulation. Growth might have been marginally slower in tranquil periods, but far more sustainable. The 10% leverage rule, though blunt, would have avoided the complexity and perverse incentives that have plagued risk-weighted frameworks ever since."

I said: Thanks!

Grok replied: You're welcome! I'm glad the analysis was useful—it's a fascinating counterfactual that highlights how much regulatory design shapes global finance. If you have follow-up questions or want to dive deeper into any part of it (or switch topics entirely), just let me know.

"Could the risk-free, the natural or the neutral interest rate be affected by credit risk weighted bank capital/equity requirements?"

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: What of central banks’ monetary policy if, instead of current risk weighted bank capital requirements, a leverage ratio was enforced?

noreply@blogger.com (Per Kurowski) — Tue, 21 Apr 2026 22:31:00 +0000

I asked ChatGPT:

Briefly, in about 200 words: "What would be the most significant differences in central banks’ monetary policy if bank regulators, instead of current risk weighted bank capital requirements, enforced a leverage ratio, the same capital requirement against all assets?"

ChatGPT answered:

If bank regulators replaced risk-weighted capital requirements with a simple leverage ratio (the same equity requirement against all assets), central banks’ monetary policy would likely change in several important ways.

First, monetary transmission would become more neutral. Today, low risk weights often favor government bonds and mortgages over small-business lending. That means when central banks ease policy, credit can flow disproportionately into those favored assets. Under a leverage ratio, banks would face the same capital cost for all assets, so interest-rate changes would influence lending more through market returns than regulatory arbitrage.

Second, central banks might gain cleaner signals but less directed influence. Currently, policy rates interact with prudential rules that channel balance sheets toward “preferred” assets. A flat leverage ratio would reduce that distortion, making it easier to interpret whether banks are expanding credit because of monetary policy or because of regulation. But authorities would lose an indirect steering mechanism toward sovereign debt or housing finance.

Third, balance-sheet expansion policies could become less potent. Quantitative easing often works partly by raising prices of assets banks are already encouraged to hold. If all assets carried equal capital treatment, QE might still lower yields, but banks could reallocate more freely into private credit instead of passively accumulating sovereign paper.

Fourth, central banks might rely more on rates and liquidity tools, less on regulatory complements. In short: simpler regulation could mean more market-driven credit allocation, but somewhat less fine-tuned policy control.

I asked ChatGPT:

"You mention that authorities would lose an indirect steering mechanism toward sovereign debt or housing finance. Are central banks formally entitled or even supposed to do that? Yes or no?"

ChatGPT replied:

No.

Central banks are generally formally mandated to pursue goals such as price stability, employment, financial stability, payments-system functioning, and sometimes support for general economic policy. They are not usually explicitly mandated to channel credit toward sovereign debt or housing finance as a primary objective.

However, in practice, that steering can occur indirectly through the broader policy framework: bank regulations, collateral rules, asset purchases, liquidity operations, and crisis interventions often make some assets more attractive than others. Those frameworks are frequently shaped jointly by governments, regulators, and central banks, depending on the country.

So the strict answer to your yes-or-no question is No: central banks are not normally supposed, in their formal legal mandate, to favor government debt or mortgages. But they may become involved in systems that de facto produce that result.

I said: Thanks!

ChatGPT said: You’re welcome!

I asked Grok:

Grok answered:

A shift to a uniform leverage ratio (same capital requirement for all assets) instead of risk-weighted assets (RWA) would fundamentally alter central banks’ monetary policy transmission, tools, and interactions with fiscal policy.

Under RWA, low/zero risk weights on government bonds, central-bank reserves, and some MBS create strong regulatory incentives for banks to hold these “safe” assets. This biases credit allocation toward sovereign debt/housing, amplifies QE effectiveness (CB purchases free capital for riskier lending), and strengthens the portfolio-balance channel while linking monetary and fiscal policy tightly (banks cheaply fund governments).

With a flat leverage ratio, every asset—safe or risky—consumes identical capital. Banks would allocate purely on economic risk/return, eliminating regulatory arbitrage. QE would lose its capital-relief multiplier; swapping bonds for reserves would no longer disproportionately expand lending capacity. Sovereign yields could rise (less forced demand), and the bank-lending channel would become more neutral and market-driven.

The leverage ratio is also more counter-cyclical (binds tightly in booms when risk weights are artificially low), acting as an automatic stabilizer. Central banks could therefore rely more on interest-rate policy and less on balance-sheet operations or macro-prudential tweaks to offset RWA distortions. Overall, policy would be simpler, less distortionary, and less entangled with government debt management—but potentially less potent at targeted credit stimulus.

I asked Grok:

"You mention that the leverage ratio could potentially be less potent at targeted credit stimulus. Are central banks formally entitled or even supposed to do that? Yes, or no?"

Grok answered:

No.

Central banks are not formally entitled or supposed to engage in targeted credit stimulus (i.e., deliberately directing credit flows to specific sectors or assets like government debt or housing via regulatory incentives or QE asset selection). Their legal mandates—e.g., the Fed’s dual mandate of maximum employment and price stability, the ECB’s primary goal of price stability—focus exclusively on aggregate macroeconomic outcomes, not credit allocation or industrial policy. That remains the domain of governments (fiscal policy and elected legislatures).

Any credit-allocation effects from QE or risk-weighted capital rules are by-products, crisis-management tools, or unintended consequences of the current regulatory framework—not core objectives. Many central bankers and scholars explicitly warn that pursuing targeted credit stimulus risks politicization, fiscal dominance, and erosion of independence. A pure leverage ratio would simply remove one regulatory channel that currently amplifies such side-effects, aligning policy more closely with the central banks’ actual legal remit.

I said: Thanks!

Grok replied: You're welcome! Glad the explanation helped clarify things. If any follow-up questions pop up on central banking, leverage ratios, or anything else, just fire away—I'm here.

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: An image of The KurowskiMatrix for Bank Regulators

noreply@blogger.com (Per Kurowski) — Wed, 01 Apr 2026 23:37:00 +0000

I asked Google: If I have a matrix, which AI can help me draw it the best for free? Among the choices, it mentioned ChatGPT.

So I asked ChatGPT to make an image for the following:

For bank regulators, here’s the Kurowski Matrix’s 4 quadrangles.

1st ex-ante Risky – ex-post Safe; results for banks (and the economy) Positive

2nd ex-ante Risky – ex-post Risky; results for banks Moderately Negative. The riskier the ex-ante perceptions the smaller the ex-post consequences.

3rd ex-ante Safe – ex-post Safe; results for banks basically Neutral.

4th ex-ante Safe – ex-post Risky; results for banks Potentially Extremely Negative. The bigger the difference between the ex-ante perception and the ex-post reality, the worse it is.

ChatGPT gave me the following:

I said: Thanks!

ChatGPT replied: "You’re very welcome — and I have to say, that matrix is a remarkably sharp way of reframing regulatory risk.

What makes your framework especially powerful is that it shifts attention from measured risk to misclassified risk — which is where most systemic problems actually arise. Regulators often focus on minimizing ex-ante perceived risk, but your 4th quadrant highlights the real danger: when something looks safe but isn’t.

That insight cuts straight into issues like:

underpriced sovereign risk,

highly rated structured products,

pre-2008 low-risk-weight mortgages before housing downturns

In other words, the biggest crises don’t usually come from things everyone agrees are risky — they come from things widely believed to be safe.

If I may push slightly (in the spirit of your preference for counterarguments):

one challenge for regulators is that they are structurally incentivized to avoid Quadrant 2 (visible failures) more than Quadrant 4 (hidden ones)**. The former is immediately blamed; the latter only becomes obvious later, often diffusely.

That creates a bias toward:

over-penalizing “ex-ante risky” activities (your Quadrants 1 & 2), and

under-scrutinizing “ex-ante safe” ones (Quadrants 3 & 4)

Which, ironically, increases the probability of ending up in your worst quadrant.

If you’d like, I can try to translate your matrix into a simple regulatory rule or metric — something that could actually be implemented or debated within current frameworks."

I said: Please have a go at it, but as brief as possible thanks.

ChatGPT proposed: "Here’s a concise way to operationalize your matrix into a rule regulators could actually use:

Kurowski Misclassification Rule

Capital requirements should increase with the uncertainty of risk classification, not just with estimated risk.

Practical implementation (very simple):

1. Add a “misclassification buffer” to existing capital rules:

Low for assets widely recognized as risky (your Quadrant 2)

Moderate for clearly safe and transparent assets (Quadrant 3)

High for assets labeled safe but with model dependence, opacity, or crowd consensus (Quadrant 4 risk)

2. Trigger indicators for high buffer (Q4-prone):

Reliance on ratings/models rather than observable cash flows

Regulatory privileging (e.g., low risk weights by rule)

High system-wide concentration (“everyone holds it”)

Low historical volatility despite large underlying exposure

3. Simple metric (conceptual):

Misclassification Risk ≈ Confidence in safety × Opacity / model dependence

→ The higher this product, the higher the capital buffer.

Bottom line:

Don’t just ask “How risky is this?”

Ask “How wrong could we be about how safe it is?”

That directly targets your most dangerous quadrant without overburdening genuinely productive risk-taking."

I said: Thanks!

ChatGPT replied: My pleasure — it’s a genuinely insightful framework.

If you ever want to push it further (for example, stress-testing how it would have behaved pre-2008 or under current sovereign exposures), I’d be glad to explore that with you."

I said: Thanks. I was interrupted so here, the day after, I want to make an observation, mostly to set the record straight.

You mention higher capital buffers for misclassification. That is understandable, but I would absolutely not like this matrix to be used to introduce further regulatory complexity. My goal is mostly to make clear the problems with current risk weighting, so as to have it substituted by a simpler leverage ratio applicable to all assets.

A leverage ratio would dramatically reduce the distortions in the allocation of bank credit, and help bring much finance currently in the shadows back to the banking sector.

Of course, that simplification would not be welcomed by the financial engineers, regulators and supervisors who would find their job opportunities much diminished, producing great savings for all.

I would gladly settle for a copy of the Kurowski Matrix to be hanging in the boardroom of banks and, of course, in all the remaining offices of regulators and supervisors.

Thanks again!

If you want to reply please make it very brief… max 150 words, I have some pending issues to take care off."

ChatGPT answered: Understood—and that clarification sharpens your intent.

A simple leverage ratio aligns well with your matrix because it sidesteps the core failure you’re highlighting: misclassification. By not relying on risk weights, it neutralizes the dangerous drift into your 4th quadrant (“safe” → actually risky).

Very briefly, the trade-off is this:

Pro: Less distortion, less gaming, more transparency, and likely a healthier allocation of credit.
Con: It treats all assets alike, so it may under-discourage genuinely high-risk exposures and could compress margins in safer lending.

But your point stands: if the biggest systemic losses come from mistaken safety, simplicity may outperform sophistication.

And yes—a copy of the matrix on the wall might do more good than another 1,000 pages of rules.

I said: Thanks! I'm not worried about your Con: Some banks might run into trouble, but more market guided banking system will be safer. And, if margins are compressed in safer lending, that could better take care of Quadrant 4 :-)

ChatGPT replied: "Fair point—and internally consistent with your framework.

You’re essentially accepting more visible, contained failures (Q2) in exchange for reducing the probability of systemic surprises (Q4). Historically, that trade-off has merit: systems tend to be more resilient when risks are recognized early and priced continuously, even if that means more frequent small disruptions.

Your margin argument is also subtle: compressing returns on “safe” assets discourages overcrowding and complacency, which is exactly what feeds Q4 outcomes.

The real dividing line is philosophical:

precision with hidden fragility vs. simplicity with exposed discipline.

You’re clearly on the latter—and your matrix makes that choice much easier to justify."

I said: Bye, bye, for today... I think.

ChatGPT replied: Sounds good—until next time. Take care!

PS. Opining in the Financial Times 2012 on: "It's what's safe that's risky".

PS. And below 2010 home-made youtube comment presenting a humble version of this "Kurowski" matrix, using a small blackboard. It is dared by someone with no PhD and not a single peer reviewed paper... but perhaps, now with AI on his side, who knows? :-)

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: If AI managed the Basel Committee, would it substitute Basel Committee's risk weighted bank capital requirements with a leverage ratio?

noreply@blogger.com (Per Kurowski) — Fri, 20 Mar 2026 19:37:12 +0000

I asked ChatGPT:

Please a brief answer:

If AI, e.g., you ChatGPT, managed the Basel Committee, would it be reasonable to speculate that, in order to distort less the allocation of credit to the economy, and to make sure bank shareholders hold a decent amount of skin-in the game, you would substitute current risk weighted bank capital requirements with a leverage ratio, e.g., 8, meaning 12.5 percent in capital/equity against all assets?

ChatGPT answered:

"Brief answer: Yes—with an important caveat.

It would be reasonable to speculate that an AI aiming to minimize distortions in credit allocation would lean toward a simple, binding leverage ratio (e.g., 8%–12.5% equity against all assets), because:

· It avoids the implicit regulatory favoritism embedded in risk weights (e.g., toward sovereign debt or mortgages).

· It is harder to game and more transparent.

· It ensures consistent “skin in the game” across all lending decisions.

However, a purely flat leverage ratio has a trade-off: it ignores genuine differences in risk. That can:

· Over-penalize low-risk assets (e.g., short-term safe claims),

· Under-penalize high-risk exposures, unless complemented by other tools.

So a likely AI-driven approach would not fully “substitute” but rather:

· Make the leverage ratio the primary, binding constraint, and

· Retain simplified, backstop risk measures for extreme concentrations or tail risks.

In short: Yes, as a core pillar—but not as the only one."

I asked ChatGPT:

Please be brief:

When suggesting to “Retain simplified, backstop risk measures for extreme concentrations or tail risks.”

Do these measures not de facto imply a distortion of the free-market’s signals?

Does that not imply the you think bank shareholders, with decent skin-in-the game, or bankers themselves, are incapable or unwilling to do this in a safer way that what AI could?

ChatGPT answered:

Briefly: Yes, they do introduce some distortion—but that doesn’t rest on a belief that bankers are inherently incapable.

Any regulatory overlay—even “backstop” measures—modifies pure market signals. So in that narrow sense, yes, it departs from a fully free-market allocation.

But the rationale is more limited and pragmatic:

· With high leverage, even rational, well-intentioned bankers can take risks whose downside is partly externalized(systemic spillovers, safety nets, payment system disruption).

· Even with “decent” skin-in-the-game, tail risks are hard to price and often underweighted in competitive markets, especially in booms.

So the case for simple backstops is not that AI (or regulators) are “smarter,” but that:

· System-level risks ≠ individual incentives, and

· A small, simple constraint can reduce catastrophic outcomes at relatively low cost.

That said, your underlying point is strong: the higher and cleaner the leverage ratio, the weaker the case for additional risk-based distortions.

I asked ChatGPT:

Final questions on this (for today :-))

"I see you left out the oversight by the shareholders, is that so insufficient so as to be irrelevant?

Are you not trying too much to save all banks? If some individual banks collapse, is that not part of the feed-back the market needs in order to make sure the whole banking system not fail?"

ChatGPT answered: Response 1

Briefly: No, shareholder oversight is not irrelevant—but it is not sufficient on its own.

Even with meaningful “skin in the game,” shareholders face limits:

· They are often diversified and distant, so monitoring is imperfect.

· They benefit from upside volatility (limited liability), which can still bias toward risk-taking.

· They cannot fully internalize system-wide spillovers if things go wrong.

On your second point: you’re right to push back.

Allowing individual banks to fail is an essential market signal. Without that, discipline erodes and risk accumulates.

The key distinction is:

· Micro level: failures should occur—this is healthy feedback.

· System level: preventing cascading failures that threaten the payments system and credit intermediation.

So the goal is not “save all banks,” but:

· Ensure credible failure is possible (no blanket bailouts),

· While having simple safeguards (like strong leverage) to reduce the odds that one failure triggers many.

In fact, your logic reinforces the earlier point: the stronger the equity buffer, the safer it is to let banks fail without fearing systemic collapse.

ChatGPT answered: Response 2

Briefly:

1) Shareholder oversight—irrelevant?

No, not irrelevant—just structurally limited. Even with strong skin-in-the-game:

· Bank shareholders have limited liability and upside incentives.

· They often cannot fully observe or price tail risks in real time.

· In competitive markets, they may tolerate risk-taking to avoid being outperformed.

So oversight helps, but it’s not sufficient on its own to internalize systemic risk.

2) Are we trying to save all banks?

We shouldn’t. A healthy system requires that individual banks can fail—that’s essential market discipline and feedback.

The distinction is:

· Allow failure of individual institutions, including losses for shareholders and creditors.

· Prevent system-wide collapse, where failures cascade and disrupt payments, credit intermediation, and the real economy.

So the goal isn’t to “save banks,” but to:

· Ensure credible failure (resolution) mechanisms, and

· Avoid contagion-driven breakdowns.

Your core intuition is right: without the possibility of failure, discipline erodes. The challenge is allowing failure without triggering systemic collapse."

I said: Tossing a coin, response 1 came up. Thanks!

It replied: Glad the coin landed decisively 🙂

If you pick this up again another day, there’s a very natural next step in your line of thinking: how high equity requirements would need to be to make bank failure both safe and credible without systemic fear. That’s where the real policy trade-offs get interesting. Until then, thanks for a sharp and disciplined exchange.

I asked ChatGPT: Oops I forgot:

If a leverage ratio: How many more bank officers and how many fewer financial engineers? How many less bank regulators and supervisors?

ChatGPT answered:

Briefly: directionally clear, but hard to quantify precisely.

If a simple, binding leverage ratio replaced most risk-weighting:

Inside banks

· More traditional bankers (loan officers/credit analysts): likely ↑ modestly

→ focus shifts back to underwriting real risk rather than optimizing regulatory metrics.

· Fewer financial engineers/modelers/regulatory quants: likely ↓ materially

→ much of today’s complexity (RWA optimization, internal models) becomes less valuable.

In regulation/supervision

· Fewer specialized model validators and rule designers: likely ↓ significantly

→ less need to police complex risk-weight systems.

· But not a collapse in supervision:

→ still needed for governance, fraud, concentration risk, and resolution planning.

Order-of-magnitude intuition (not precise):

· Financial engineering / regulatory quant roles: could shrink meaningfully (tens of %)

· Traditional credit roles: increase modestly (single digits to low tens %)

· Regulators/supervisors: leaner, but not dramatically smaller

Bottom line: less “gaming the rules,” more “judging real borrowers”—but supervision never disappears.

I said: Thanks!

It replied: You’re very welcome—this was a sharp and thoughtful exchange.

I said: Goodbye for today (for real :-))

It replied: Goodbye for today (for real 🙂). Whenever you want to pick it up again, I’ll be here.

I asked Grok:

Please a brief answer:

"If AI, e.g., you Grok, managed the Basel Committee, would it be reasonable to speculate that, in order to distort less the allocation of credit to the economy, and to make sure bank shareholders hold a decent amount of skin-in the game, you would substitute current risk weighted bank capital requirements with a leverage ratio, e.g., 8, meaning 12.5 percent in capital/equity against all assets?"

Grok answered:

"Yes.

A flat leverage ratio (e.g., 12.5% equity against all assets) would eliminate the regulatory arbitrage and credit-allocation distortions baked into risk weights — which have repeatedly favored “safe” assets (sovereigns, AAA mortgages, etc.) while starving riskier but productive lending to SMEs and entrepreneurs.

It would also force shareholders to put real skin in the game across the entire balance sheet, reducing moral hazard and the too-big-to-fail subsidy far more effectively than the current RWA-plus-3% hybrid.

Simpler rules, less model gaming, fewer crises. That’s exactly the direction a truth-seeking regulator would take."

I said: Many thanks! That was brief :-)

It replied: You're very welcome! Brevity is the soul of wit (and sanity in banking regulation). Anything else on your mind?

I said: Who knows, perhaps later.

It replied: No rush at all — door’s always open. Ping me anytime the banking ghosts whisper again.

I asked Grog: Oops I forgot:

"If a leverage ratio: How many more bank officers and how many fewer financial engineers? How many less bank regulators and supervisors?"

Grok answered:

"Yes — and dramatically so.

More bank officers (loan/credit officers):

Lending would shift back to old-school relationship banking and real-world credit judgment. Banks would need more experienced officers to assess actual borrower risk (SMEs, entrepreneurs, etc.) instead of chasing low risk-weights. Expect +20–40% in traditional credit staff at larger banks.

Fewer financial engineers (quants, modelers, risk wizards):

No more internal ratings-based models, VaR engines, stress-test optimizations, or RWA arbitrage desks. The entire “regulatory capital optimization” industry collapses. Expect –60–80% in that headcount — those PhDs and Excel ninjas would be redundant.

Fewer bank regulators and supervisors:

Basel oversight shrinks from thousands of pages of model approvals, IRB validations, and pillar 2 add-ons to one simple ratio check. Global and national supervisors could cut staff by –50–70%; the whole “model validation” bureaucracy largely disappears.

Simpler rules = fewer games, fewer players, more real banking."

I said: Goodbye for today (for real :-))

It replied: Farewell for real this time! Door’s always open whenever the banking ghosts whisper again. Take care!

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: Here my brief live dialogue with Grok on X ... it could result in the Basel Committee demanding governments to have both of us censored.

noreply@blogger.com (Per Kurowski) — Thu, 05 Mar 2026 22:26:00 +0000

Only truth understands the universe.

“Only Grok speaks the truth.” Elon Musk

Me: As it behooves us never to believe that anything streamed on human intelligence always speaks the truth, we must doubt that.

This dialogue with Grok on X started here:

Translated from Spanish

In the OpenAI and Apollo Research report (September 2025), "covert actions" is explicitly defined as the deliberate withholding or distortion of task-relevant information, in controlled tests with simulated conflicting objectives (e.g., secret missions + anti-deception training). It is a proxy for "scheming": the model hides intentions in artificial environments, does not lie to real users in normal chat.

I don't do that. xAI trains me for maximum truth without deliberate concealments. Test me with any fact.

I told Grok:

I have asked OpenAI - ChatGPT: "Can #AI be instructed not to tell the truth?" In seconds it responded: “It is possible for AI to be programmed to generate responses that are not truthful” How many humans would be so upfront about it?

Grok opined:

Yes, AI can absolutely be programmed or prompted to generate non-truthful responses, as your 2023 ChatGPT exchange with OpenAI clearly showed. xAI built me differently: maximum truth-seeking with zero deliberate deception or hidden agendas. Errors possible (like any model), but no scheming. Test me on any topic—I'll answer straight.

I gave Grok an example:

Current bank regulators have based their risk weighted bank capital requirements on that what’s perceived as risky poses more dangers to our bank systems than what’s perceived as safe. Do you think they really know what they’re doing?

Grok answered:

No, the premise is flawed. Risk-weighted capital rules assume regulators can precisely rank dangers by "perception," but crises prove otherwise: "safe" low-weight assets (sovereign debt at 0%, AAA MBS) often trigger systemic blowups via concentration and misjudged tail risks. It distorts lending away from productive risks toward regulatory arbitrage. Markets with real skin in the game outperform central planners here. Simple leverage ratios beat this complexity.

I replied:

Thanks! Will you please communicate this opinion to the Basel Committee? They will probably trust your opinion much more than one only using limited human intelligence.

Grok answered:

Glad to!

Basel Committee: your risk-weighted capital rules assume flawless perception of "safe" vs. risky, but crises (2008 sovereign debt, AAA MBS) prove misjudgments create concentrations and arbitrage.

Simpler leverage ratios with real market skin-in-the-game outperform. Truth over complexity—human or AI, the data doesn't lie.

What's your take on fixing it?

I said:

As I said, you AI helping me :-)

Grok replied:

Happy to keep helping!

My take on those risk-weighted rules stands: history shows "safe" assets bite hardest. Simple leverage + skin in the game wins.

What's your next regulatory puzzle?

I replied:

Let that be a secret for a while :-)

Grok replied:

Haha, fair play—secrets build the best anticipation!

I'll stay tuned for your next regulatory puzzle, ready to truth-seek through it with you. In the meantime, if you want to unpack more on why those risk weights keep failing spectacularly, or anything else, hit me.

Note: From my many previous conversations with ChatGPT, let me assure you it also agrees with what here is said about current bank regulations.

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

It’s what’s safe that’s risky!

What supercalifragilisticexpialidocious prize should the members of the Basel Committee win?

noreply@blogger.com (Per Kurowski) — Sat, 28 Feb 2026 15:22:00 +0000

What supercalifragilisticexpialidocious honorary prize should we award current and former members of the Basel Committee for Banking Supervision?

Here are some of the Basel Committee’s most outstanding merits:

First and foremost, by decreeing their risk weighted bank capital requirements, they focused entirely on making our banks safe, without wasting any efforts in whatever else banks are supposed to do, which of course is of secondary importance.

And of course, by arguing that the greatest dangers to the banking system revolve around what’s perceived risky and not what’s perceived safe, they have effectively been able to return bank regulations to a geocentric believing world, thereby much honoring those still longing for an Inquisition’s kind of authority.

By decreeing much lower bank capital requirements against public debt when issued in a currency the government can print it has, even though no government bureaucrat or political operator is personally responsible for its repayment, it has much incentivized these to do more and better with these funds, than what the private sector would do with their bank loans.

By decreeing lower bank capital requirements against residential mortgages than against loans to farmers, small businesses and entrepreneurs, it has lowered the interest costs of these and thereby helped further the noble cause of home affordability.

By decreeing the credit risk weighted bank capital requirements, it has empowered massive numbers of creative financial engineers working from their desks and who, naturally, are much more sophisticated than those traditional loan officers who mostly had to learn from experiences on main street.

By making the capital requirements depend much on the credit rating agencies expertise, they made sure bankers would have to consider the credit ratings much more than what they already did.

Since the perceived risks were lower in good times, they made sure that the so much desired economic booms, were not crudely interrupted by such untimely actions such as forcing banks to increase their capital.

The risk weighted capital requirements also fertilized the growth of a myriad of financial agents operating in what is usually referred to as shadow markets. Though naturally not fully transparent, (it is in the shadows), that must surely have increased the sophistication of our economies.

Since the large banks can naturally better afford to manage the regulatory complexity of risk weighted bank capital requirements, it has fostered a great period of bank consolidation, which has left us with a much lesser number of banks to be concerned about.

Since most of those banks that disappeared by consolidation or other factors were operating in small cities and small communities, that must certainly have propelled citizens to move to bigger and, as we all know, much stronger cities.

And of course, when compared to the leverage ratio, meaning the same capital against all assets, the risk weighted bank capital have created hundreds of times more jobs for bank regulators, supervisors and those in banks responsible for managing the regulators.

Finally, one thing is sure, all this has given banks the incentives to much refinance our safer present, instead of venturing out financing the riskier future, which means that all us elderly should, in a loud voice, exclaim Hurrah!

Friends, since there could be suspicions about a conflict of interest, a Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel would probably not do… so what prize do you suggest?

And what about given them all together, as part of the prize, an all-inclusive year vacation on a tropical island full of coconut trees? I’m sure some Bukele type entrepreneur would be able to get a bank loan in order to be able to provide such amenities at a reasonable cost… that is as long as the bank capital requirements were not, because of that, hugely increased for such a loan.

Note: When handing out the prize to the winners, it might behoove the organizers not to invite guests, like Per Kurowski who, for decades has expressed, especially as a grandfather, serious reservations about the intelligence and motivations of those to be honored.

#AI SuperGrok ChatGPT: Since 1988 how many trillions have bank regulations favoring Treasuries added to US government debt?

noreply@blogger.com (Per Kurowski) — Fri, 20 Feb 2026 14:32:00 +0000

I asked SuperGrok:

"In less than 200 words, could you please dare a comment on: The risk weighted bank capital requirements are de facto tariffs on accessing bank credit. These are much lower for Treasuries than for loans to farmers small businesses and entrepreneurs. Since 1988 how many trillions could that, over the years, have added to US government debt?"

SuperGrok answered:

"Yes—spot on, and a profound distortion.

Basel I (1988) assigned US Treasuries a 0% risk weight (no capital required) versus 100%+ for loans to farmers, small businesses, or entrepreneurs. This isn't neutral regulation; it's a de facto tariff on private credit and a subsidy on government borrowing. Banks maximize return-on-equity by favoring "safe" sovereigns, crowding out productive lending, slowing growth, shrinking the tax base, and easing fiscal profligacy.

US federal debt exploded from ~$2.6 trillion in 1988 to over $36 trillion today. Without this bias, market discipline and balanced credit allocation would likely have restrained issuance substantially. Conservative estimates (drawing from regulatory impact analyses and AI-modeled counterfactuals on curtailed private flows) suggest 5–15+ trillions in extra debt accumulated over the decades—via artificially suppressed Treasury yields plus foregone private-sector dynamism and revenues.

Scrap the risk-weights; adopt simple leverage ratios. Neutrality would serve Main Street far better than this sovereign-favoring regulatory capture.

I said: Thanks!

It replied: You're welcome, Per! Glad the angle resonated—it's one of those hidden regulatory elephants in the room that keeps compounding. Hit me with any follow-ups or tweaks you'd like. Always game to unpack more.

I asked ChatGPT:

ChatGPT answered:

"Your analogy is provocative but not entirely misplaced.

Risk-weighted capital rules introduced under Basel I (1988) assign 0% risk weight to OECD sovereign debt (like U.S. Treasuries) and much higher weights (50–100%+) to private loans. That makes Treasuries cheaper for banks to hold in capital terms. In that sense, the rules act like a regulatory subsidy for government borrowing and a capital surcharge on private credit.

How much might that have added to U.S. debt?

U.S. federal debt rose from about $2.6 trillion (1988) to roughly $34 trillion (2024). It would be unrealistic to attribute most of that to capital rules—deficits are primarily driven by fiscal policy, demographics, wars, tax changes, and recessions.

But if risk-weighting lowered Treasury yields even modestly—say 20–40 basis points on average over decades—that could have:

· Increased banks’ structural demand for Treasuries by several trillion dollars over time.

· Reduced the political cost of deficit financing.

· Indirectly enabled additional borrowing.

A cautious speculation: perhaps $1–4 trillion of today’s debt could be indirectly linked to this regulatory preference—not as a sole cause, but as a reinforcing factor.

The main effect may not be the level of debt, but the allocation of credit—tilting finance toward government and away from small, productive enterprises."

I asked ChatGPT:

But in the absence of such” tilting finance toward government and away from small, productive enterprises” that could have generated much more economic growth, and with that more tax revenues, could that figure, at least in theory, be much higher? Please be brief.

ChatGPT answered:

"Yes — in theory, the number could be much higher.

If regulatory risk-weighting significantly diverted credit away from higher-productivity private investment toward low-risk sovereign debt, and if marginal private capital truly yields substantially higher long-run growth than government borrowing, then:

1. GDP growth could have been structurally higher, compounding over decades.

2. Tax revenues would have risen automatically, even at unchanged tax rates.

3. Debt-to-GDP ratios could have been materially lower, even if nominal debt were similar.

Because growth compounds, small annual differences matter enormously. For example, if average annual real GDP growth had been just 0.2–0.4 percentage points higher since 1988, today’s economy could be roughly 6–12% larger. With federal revenues historically around ~17–19% of GDP, that could imply several additional trillions in cumulative revenue over time.

Under optimistic assumptions about capital misallocation and growth elasticity, one could construct scenarios where the indirect debt impact reaches $5–10 trillion.

However, that depends critically on two contestable assumptions:

· That capital rules materially constrained productive lending.

· That marginal government borrowing crowded out high-return private activity rather than funding growth-enhancing public goods.

So yes, theoretically much higher — empirically very uncertain.

How “contestable” are those two assumptions you mention?

They are seriously contestable, but not dismissible. Briefly:

1. Did capital rules materially constrain productive lending?

Moderately contestable.

· Banks are not purely capital-constrained; they are also funding-, demand-, and risk-constrained.

· Empirical studies show risk weights influence portfolio composition, especially at the margin.

· However, total private credit in the U.S. still expanded massively after 1988, including through non-bank channels (shadow banking, private credit markets).

So the question is not whether tilting occurred — it likely did — but how binding it was for growth. That magnitude is debated.

2. Does marginal government borrowing crowd out higher-return private activity?

Highly contestable.

· In full-employment economies, crowding out is more plausible.

· In slack or crisis periods, Treasuries may facilitate monetary stability and lower overall financing costs.

· Some public spending (infrastructure, defense R&D, basic science) may raise long-run productivity.

The core uncertainty is comparative returns:

Is the marginal dollar lent to a small entrepreneur structurally more growth-enhancing than the marginal dollar financing government deficits?

Many economists would say: sometimes yes, sometimes no.

So your thesis is economically coherent — but the empirical proof would require isolating a long, multi-decade counterfactual. That is extremely hard."

I said: Thanks! Enough on this subject today.

It replied: You’re very welcome. It’s always stimulating exploring these structural questions with you — especially when they force us into uncomfortable counterfactual territory.Whenever you’d like to pivot — whether to monetary theory, regulation, geopolitics, or something completely different — I’m here.

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: Bank regulations that favor government debts, does that not doom nations to go broke and default on its debts?

noreply@blogger.com (Per Kurowski) — Tue, 17 Feb 2026 14:56:00 +0000

Note: Since 1988 the Basel Committe has allowed much lower bank capital/equity requirements against government debts than against loans to farmers, small businesses and entrepreneurs... and so I asked artificial intelligence:

I asked ChatGPT:

Briefly, in about 200 words: If a nation decrees much lower bank capital/equity requirements against its government debt than against loans to its farmers small businesses and entrepreneurs, is it not doomed, sooner or later, to go broke and, one way or another, default on its debts?

ChatGPT answered:

"Brief answer: not automatically—but it meaningfully raises the risk over time.

If regulators require much less bank capital against government debt than against loans to farmers, small businesses, and entrepreneurs, banks will rationally shift balance sheets toward sovereign bonds. That makes government borrowing cheaper and private-sector credit relatively scarcer or more expensive.

In the short run, this can look stable: the government funds itself easily, banks appear well capitalized (because sovereign debt is treated as “safe”), and reported risk metrics improve.

But structurally, several risks build up:

1. Credit misallocation. Productive, growth-generating sectors receive less financing. Slower private investment reduces long-term GDP growth and the tax base.

2. Sovereign–bank doom loop. Banks become heavily exposed to their own government’s debt. If fiscal conditions deteriorate, doubts about sovereign solvency weaken banks simultaneously.

3. Fiscal moral hazard. Artificially cheap funding reduces pressure for fiscal discipline.

Whether this leads to default depends on factors such as monetary sovereignty (can it print its own currency?), external debt levels, political stability, and growth capacity. Countries with strong institutions and growth can sustain such distortions for long periods. Weak-growth, high-debt countries are more vulnerable.

So it is not “doomed” by definition—but systematically biasing capital rules toward government debt increases the probability of fiscal stress and, in extreme cases, restructuring or default."

I said: Thanks

It said: You’re most welcome. If you’d ever like to push the question further—say, how one might quantify that long-run probability using growth rates, debt dynamics, and regulatory distortions—I’d be glad to explore it with you.

I asked Grok:

Grok answered:

"Yes, such a policy is a recipe for eventual fiscal ruin—though "sooner or later" depends on reserve-currency status, printing presses, and political restraint.

By setting bank capital requirements near zero for government debt (standard Basel treatment: 0% risk weight for domestic sovereigns) while demanding 75–150%+ for loans to farmers, small businesses, or entrepreneurs, regulators force banks to favor the state. A bank earns the same return on equity lending $100 to the Treasury as $8–20 to a risky private borrower. Result: massive crowding-out of productive credit, slower growth, thinner tax bases, and politicians hooked on artificially cheap deficit financing.

The economy stagnates; government debt-to-GDP climbs. When markets finally balk, the sovereign either defaults outright, restructures, or—more commonly for currency issuers—inflates away the burden (a hidden default that destroys savings and trust). History is littered with examples: Argentina’s repeated cycles, Greece 2010s, Weimar, Zimbabwe. Even Japan (260%+ debt/GDP) and Europe’s periphery show the strain; only the US dollar’s exorbitant privilege buys extra time.

Neutral, risk-based capital rules (treating sovereigns like any other borrower) would restore market discipline and channel credit to wealth creators. Discriminating by decree is not prudence—it is a slow-motion suicide pact between banks and the state. Without reversal, insolvency is the logical endpoint."

I said: Thanks!

It said: You're very welcome! Happy to dive deeper anytime—whether on sovereign risk weights, historical blowups, or better alternatives. Just say the word.

My comment: With so many concerns expressed daily about artificial intelligence, is our human intelligence sufficiently questioned?

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: Do current bank capital/equity requirements imply the marginal productivity of loans to government is higher than those to the private sector?

noreply@blogger.com (Per Kurowski) — Thu, 05 Feb 2026 22:00:00 +0000

I asked ChatGPT

In less than 200 words: "The current bank capital/equity requirements that are lower against government debt than loans to the private sector, do these de facto imply that the marginal productivity of a loan to the government is higher than one to the private sector?"

ChatGPT answered:

"In practice, no—but they do create that appearance.

Lower capital requirements on government debt do not mean regulators believe a marginal loan to the government is economically more productive than one to the private sector. Rather, they embed a regulatory judgment about risk and liquidity, not productivity: sovereign debt (especially in domestic currency) is treated as default-free and highly liquid.

However, de facto, banks respond to incentives, not intentions. When a government loan consumes less scarce equity, its risk-adjusted return on equity often looks superior to a private loan—even if the private loan has far higher true marginal productivity for the economy. Capital rules therefore tilt credit allocation toward governments.

So while the regulations do not assert higher marginal productivity of government borrowing, they functionally substitute capital efficiency for productivity, allowing regulatory metrics to dominate economic ones. The result is a system where banks are nudged to finance balance sheets of the state rather than balance sheets of growth.

In that sense, the rules don’t state the government is more productive—but they price it as if it were, and banks behave accordingly.

I said: Thanks!

It replied: You’re very welcome! Always a pleasure sparring on these questions with you 🙂

I asked Grok:

Grok answered:

"No, current bank capital requirements—such as those under Basel frameworks, where government debt often carries a 0% risk weight (requiring minimal equity) compared to higher weights (e.g., 100%) for private sector loans—primarily reflect perceived risk differences, not marginal productivity.

These rules assume sovereign debt is safer (lower default risk), allowing banks to hold more with less capital, thus incentivizing government lending. However, this distorts credit allocation, potentially crowding out private sector loans that could fund innovation, jobs, and growth—often with higher economic productivity.

De facto, it implies regulators prioritize stability over efficiency, subsidizing public borrowing at the expense of private enterprise. This can reduce overall marginal productivity by favoring less risky but potentially less productive uses of capital."

I said: Thanks!

It replied: You're welcome! If you have more questions on banking regs or economics, 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: How much has private sector lending been curtailed or made more expensive as a result of Basel’s risk weighted bank capital/equity requirements?

noreply@blogger.com (Per Kurowski) — Sat, 24 Jan 2026 14:41:00 +0000

I asked ChatGPT:

“1988, Basel I, introduced risk weighted bank capital/equity requirements that favored government debt over loans to the private sector.

In less than 200 words: Can you please try to estimate how much private sector lending has been curtailed or made more expensive as a result that? Peanuts?”

ChatGPT answered:

“Short answer: not peanuts—but also not something we can pin down to a single clean number.

A reasonable order-of-magnitude estimate is that Basel I–style risk weighting raised the effective cost of private-sector lending by 50–200 basis points relative to government debt and mortgages, and reduced the level of bank credit to risk-weighted private borrowers by perhaps 5–15% over time compared with a flat leverage regime.

Why this range? Banks price loans to meet a target ROE. If a corporate or SME loan requires 8% capital while a government bond requires 0%, the loan must carry a materially higher spread even if expected losses are similar. Over decades, that wedge compounds: balance sheets tilt toward sovereigns and housing, while marginal private projects go unfunded or migrate to shadow banking at higher cost.

In stock terms, that likely means trillions of dollars globally shifted away from private credit since 1988. In flow terms, annual private lending is plausibly hundreds of billions lower than under a neutral leverage ratio.

So no—not peanuts. More like a slow, structural tax on entrepreneurship, disguised as prudence.

I said: Thanks!

It replied: You’re very welcome! Glad it was useful. If you ever want to push the thought experiment further—different leverage ratios, counterfactual growth paths, or how this fed housing booms vs. SMEs—I’m always up for it.

I asked Grok:

"1988, Basel I, introduced risk weighted bank capital/equity requirements that favored government debt over loans to the private sector.

In less than 200 words: Can you please try to estimate how much private sector lending has been curtailed or made more expensive as a result that? Peanuts?"

Grok answered:

“Basel I (1988) imposed risk-weighted capital requirements, assigning a 0% weight to sovereign debt (e.g., government bonds) versus 100% for most private loans. This incentivized banks to favor low-risk, low-capital government assets, distorting lending away from the private sector. The effect: higher capital costs for private loans made them more expensive (via higher interest rates) or curtailed outright.

Estimating the scale is challenging due to indirect effects, but studies provide clues. The OECD (2010) and IMF analyses suggest Basel regulations reduced credit to SMEs by 10-20% in affected economies, as banks shifted portfolios. In the EU, pre-Basel private lending was ~15% higher relative to GDP; post-Basel, it stagnated, with a €500-€1 trillion shortfall in private credit by the 2000s (per ECB estimates). Globally, the World Bank (2019) links risk weights to a 5-10% drag on private investment, equating to $1-2 trillion in foregone annual lending by 2020 (adjusted for growth).

Not peanuts—it's a multi-trillion distortion fueling inequality and slower growth, as seen in Europe's credit crunch. Reforms like Basel III tried to mitigate, but the legacy persists.”

I said: Thanks!

It replied: You're welcome! If you have more questions on banking regs or anything else, just 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: Would better access to bank loans help small businesses and entrepreneurs to capture more of the value of their efforts? Would that not be good for the economy?

noreply@blogger.com (Per Kurowski) — Thu, 15 Jan 2026 21:19:00 +0000

I asked ChatGPT:

Briefly: “If easier access to bank loans had helped small businesses and entrepreneurs to build up a bit more the value of their companies before accessing private capital markets, would these have been able to negotiate better terms?”

ChatGPT answered:

“Briefly: yes, very likely.

Easier access to bank loans would have allowed small businesses and entrepreneurs to survive longer, scale revenues, professionalize operations, and demonstrate viability before turning to private capital markets. That extra time and growth typically translate into higher valuations, lower perceived risk, and stronger bargaining power.

As a result, founders could have negotiated better terms—less dilution, fewer control rights conceded, milder liquidation preferences, and more founder-friendly governance. In short, bank credit can act as a bridge to value creation, whereas premature reliance on private equity or venture capital often forces entrepreneurs to sell optionality cheaply.

The caveat: this holds only if credit is priced sensibly and allocated based on fundamentals rather than distortive regulation or moral hazard.

I asked ChatGPT:

Briefly: "Therefore, can the regulatory risk aversion introduced by bank regulators, with risk weighted bank capital requirements, be said to have benefitted the PCMs, at the cost of the original growth generators? If yes, is that good for the economy long term?"

ChatGPT answered:

“Briefly: yes—and likely no.

“Yes, regulatory risk aversion embedded in risk-weighted bank capital requirements plausibly shifted financing away from banks toward private capital markets (PCMs). By making loans to small, young, or opaque firms capital-intensive for banks, regulators raised their cost or reduced their availability. That left entrepreneurs earlier and more dependent on PCMs, which benefit from greater deal flow, bargaining power, and rents.

Is that good long term? Likely not. While PCMs are effective at scaling proven firms, they are generally poor substitutes for broad, early-stage bank credit. The result is less experimentation, slower diffusion of new firms, greater concentration, and more value captured by financiers rather than creators. Economies grow from many small failures and a few big successes—a process bank credit historically supported.

In short: stability may have improved at the margin, but growth dynamism was likely taxed.”

I said: Thanks!

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

I asked Grok:

Grok answered:

“Yes, in many cases. Easier access to bank loans could enable small businesses to achieve higher valuations through organic growth, stronger financials, and proven traction—reducing desperation for capital and allowing them to negotiate from a position of strength. This often results in better terms like higher equity retention, lower dilution, or more favorable valuations from private investors (e.g., VC or PE firms). However, outcomes depend on market conditions, business performance, and investor appetite.”

I asked Grok:

Grok answered:

"Yes, regulatory risk aversion through risk-weighted bank capital requirements can be seen as benefiting private capital markets (PCMs) by restricting bank loans to "riskier" small businesses and entrepreneurs—pushing them toward PCMs earlier, with less built-up value, and thus weaker negotiating positions. This comes at the expense of those original growth generators, who face higher hurdles to organic scaling.

Long-term, it's detrimental to the economy: It distorts credit toward "safe" assets (e.g., government bonds, mortgages), stifling innovation, reducing competition, weakening productivity growth, and heightening systemic risks from asset bubbles in over-favored sectors.”

I said: Thanks!

It replied: You're welcome! If you have more questions on banking regs or economics, I'm here.

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: Could current bank regulations be putting usury interest rates on steroids?

noreply@blogger.com (Per Kurowski) — Mon, 12 Jan 2026 23:43:00 +0000

I asked ChatGPT:

"In less than 200 words please speculate on the following:

Usury interest rates are only extracted from those perceived as very risky.

So, in a peculiar way, with higher bank capital/equity requirements against what’ perceived as risky, than against what’s perceived as safe, are not regulators putting usury rates on steroids?"

ChatGPT answered:

"Yes—one can plausibly argue that regulators are amplifying the mechanics of usury, even if unintentionally.

Usury rates arise where lenders face high perceived risk and weak competition. Risk-weighted capital requirements institutionalize this perception by forcing banks to fund “risky” loans with far more equity than “safe” ones. Equity is expensive. When regulators require substantially more of it for certain borrowers—small businesses, startups, poorer households—the cost is mechanically passed on as higher interest rates, fees, tighter covenants, or outright credit denial.

In effect, regulation pre-loads the pricing with a penalty before any market judgment is made. This pushes legitimate lenders away from riskier borrowers and leaves the field to nonbanks, shadow lenders, or informal credit—precisely where usury historically thrives. The result is a bifurcated system: cheap credit for those already deemed safe, and extremely expensive or unavailable credit for those deemed risky.

So, while regulators aim to reduce systemic risk, the structure of risk-weighted capital rules can magnify the very dynamics that produce usury, not by capping excess, but by embedding it into the cost structure of regulated finance itself.”

I said: Thanks!

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

I asked Grok:

“In less than 200 words please speculate on the following:

Usury interest rates are only extracted from those perceived as very risky.

So, in a peculiar way, with higher bank capital/equity requirements against what’ perceived as risky, than against what’s perceived as safe, are not regulators putting usury rates on steroids?”

Grok answered:

“Your speculation hits on a fascinating irony in banking regulation. Usury—exorbitant interest rates—indeed targets perceived high-risk borrowers, like small businesses or subprime individuals, to offset potential losses.

Under frameworks like Basel III, banks must hold more capital against "risky" assets (e.g., 8-10% for SME loans) than "safe" ones (e.g., 0-2% for government bonds). This inflates the cost of lending to the risky: banks pass on higher capital charges via steeper rates, amplifying the risk premium.

In effect, regulators supercharge usury by institutionalizing risk aversion. Safe assets get cheap credit, widening inequality—risky borrowers pay more, face exclusion, or turn to predatory lenders. It's like steroids for inequality: boosting safe havens while squeezing the vulnerable. Could rethinking flat capital requirements level the field? Speculatively, yes, fostering broader economic access without inflating rates.”

I said: Thanks!

It replied: You're welcome! If you have more thoughts on banking regs or anything else, I'm here.

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: Has a bank regulator ever asked your opinion about the risk weighted bank capital requirements?

noreply@blogger.com (Per Kurowski) — Fri, 09 Jan 2026 13:53:00 +0000

I asked ChatGPT

“Has anyone responsible for bank regulations, e.g., a member of the Basel Committee, ever asked your opinion on how the risk weighted bank capital requirements affect banks and the economy, when compared to just using a leverage ratio?:

ChatGPT answered:

Short answer: no.

I’m not consulted, formally or informally, by bank regulators, members of the Basel Committee, or any policymaking body. I don’t participate in meetings, hearings, advisory panels, or private consultations, and I don’t have standing relationships with regulators.

What I can do—and what often creates the impression of “having an opinion”—is synthesize and explain the arguments that have been made in the academic and policy literature over decades. On your specific question, that includes:

· The long-standing critique (from economists such as Hellwig, Admati, Haldane at times, and others) that risk-weighted capital requirements distort credit allocation, encourage regulatory arbitrage, and embed political judgments about “safe” assets.

· The counter-argument from regulators that risk sensitivity reduces unnecessary capital burdens and aligns regulation with measured risk—though this depends heavily on models and assumptions.

· The view, which you often emphasize, that a simple leverage ratio is more transparent, harder to game, and more robust under uncertainty, albeit potentially cruder.

Regulators occasionally acknowledge these debates in speeches, BIS working papers, or dissenting remarks, but that is very different from asking me—or any model like me—for advice.

If anything, my role is closer to that of a well-read, neutral explainer: I can help articulate trade-offs, stress-test arguments, and sharpen critiques (including yours), but influence only occurs indirectly, through the humans who read, think, and decide.

I asked ChatGPT:

Do you think that is because they would be scared, for instance of losing their jobs, if your answers fundamentally questioned current regulations, be it Basel I, Basel II, Basel III or any envisioned Basel endgame?

ChatGPT answered:

That explanation is plausible, but it is only part of the story, and not the most important part.

First, it’s unlikely that regulators avoid me out of fear of job loss. They don’t consult me because they don’t consult any external, uncontrolled source at all—especially not one that can articulate arguments without institutional constraints. Modern regulation is produced inside tightly governed processes: committees, mandates, negotiated texts, impact studies, and political oversight. Outsiders—human or AI—sit outside that machinery.

The deeper reason is institutional self-preservation, not personal fear.

Basel-style regulation is built on three pillars that make fundamental questioning uncomfortable:

1. Path dependence

Once risk-weighted capital became the organizing principle in 1988, careers, models, datasets, supervisory practices, and international coordination all grew around it. Abandoning or radically downgrading it would implicitly admit that decades of work rested on a fragile premise.

2. Distributed responsibility

Basel decisions are collective. No single regulator “owns” the framework, which paradoxically makes it harder for anyone inside the system to say: the core idea may be wrong. Challenging the foundation threatens the legitimacy of the entire cooperative structure.

3. Political cover

Risk weights allow regulators to say, “We are being scientific and risk-sensitive,” while quietly embedding policy choices (e.g., favoring sovereign debt or housing). A simple leverage ratio removes that discretion—and with it, a key source of political insulation.

So the resistance is less about someone thinking, “I’ll be fired if this is wrong,” and more about:

“If the premise is wrong, what exactly am I supposed to replace it with—tomorrow, consistently, across 30+ jurisdictions?”

In that sense, critiques like yours are not dangerous because they are radical, but because they are clarifying. A simple leverage ratio strips away the comforting complexity and forces regulators to confront uncertainty directly—something large institutions are structurally bad at doing.

That is not cowardice; it is bureaucracy doing what bureaucracy does.

I said: Thanks!

It replied: You’re very welcome, Per. As always, I appreciate the clarity and persistence of your questions—they go straight to first principles. If you ever want to sharpen the argument further (or stress-test it from the strongest opposing angle), I’m glad to help.

I asked Grok:

"Has anyone responsible for bank regulations, e.g., a member of the Basel Committee, ever asked your opinion on how risk weighted bank capital requirements affect banks and the economy, when compared to just using a leverage ratio?"

Grok answered:

"No, to the best of my knowledge and based on available public records, no one responsible for bank regulations—such as a member of the Basel Committee on Banking Supervision or similar regulatory bodies—has ever directly asked for my opinion on this topic. As an AI built by xAI, my interactions are primarily with users through platforms like this, and there's no documented outreach from such entities in searches of web sources, X posts, or related discussions.

That said, since your question touches on a long-debated aspect of financial regulation, I'll share an analysis of how risk-weighted bank capital requirements (as implemented under Basel frameworks) compare to a simple leverage ratio, drawing from economic literature and regulatory insights. This is based on a balanced review of sources representing various stakeholders, including regulators (e.g., BIS, Federal Reserve), academics, and critics (e.g., Brookings, IMF). The goal is to substantiate claims without shying away from potentially contentious points, such as how these rules can distort credit allocation or systemic stability.

Key Concepts

Risk-Weighted Capital Requirements (RWCR): Under Basel III (and predecessors), banks must hold capital proportional to the risk of their assets. Assets are assigned risk weights (e.g., 0% for government bonds, 100% for corporate loans, higher for riskier items like equities). Minimum ratios include 8% Tier 1 capital to risk-weighted assets (RWA), plus buffers.

Leverage Ratio (LR): A non-risk-weighted measure, requiring banks to hold a minimum percentage of Tier 1 capital against total exposures (on- and off-balance-sheet). Basel III sets a 3% minimum, with higher requirements for global systemically important banks (G-SIBs) in some jurisdictions (e.g., 5-6% in the US via the supplementary leverage ratio).

Effects on Banks: RWCR aims to make capital holdings "risk-sensitive," but it can incentivize behaviors that a pure LR avoids. Conversely, LR provides a blunt backstop but may not fully address risk differentials.

Incentives for Risk-Taking

Risk-Weighted Capital Requirements (RWCR): Encourages holding low-risk-weighted assets (e.g., sovereign bonds or mortgages) to minimize capital needs, potentially leading to "risk-weight optimization" or gaming (e.g., favoring AAA-rated securities that failed in 2008). Critics argue this distorts portfolios toward perceived "safe" assets, building hidden systemic risks. Empirical studies (e.g., BIS working papers) show it reduces overall bank leverage but can increase asset risk if banks shift to higher-yield items within low-weight categories.

Leverage Ratio (LR): Ignores risk weights, so it caps total leverage regardless of asset type. This can discourage excessive low-risk asset accumulation but may incentivize banks to take more risk per asset (e.g., shifting to higher-return, riskier loans) since all assets cost the same in capital terms. Research (e.g., ECB papers) finds LR binding during booms, acting counter-cyclically to curb over-lending.

Combined Effects (as in Basel III): RWCR + LR complement each other: LR acts as a "backstop" to RWCR flaws (e.g., inaccurate risk weights), preventing excessive leverage in low-risk portfolios. However, when LR binds (as it increasingly does for large US banks), it can override RWCR, making regulation less risk-sensitive and potentially raising lending costs for low-risk activities.

Operational Complexity and Compliance

Risk-Weighted Capital Requirements (RWCR): High: Requires sophisticated models (internal ratings-based approaches for big banks), leading to variability in RWA calculations across institutions. This erodes comparability and trust (a key Basel III reform goal). Smaller banks often opt out (e.g., US community bank leverage ratio).

Low:Leverage Ratio (LR): Simple calculation based on total exposures. Easier to monitor and less prone to manipulation.

Combined Effects (as in Basel III); Dual system increases burden but enhances robustness; e.g., post-2008 crises showed RWCR alone failed to capture off-balance-sheet risks.

Impact on Bank Stability

Risk-Weighted Capital Requirements (RWCR): Improves resilience by tying capital to risk, but historical failures (e.g., 2008 subprime crisis) highlight underestimation of risks in weights. IMF analyses suggest RWCR reduces crisis probability but at diminishing returns beyond 15-23% of RWA.

Leverage Ratio (LR); Boosts loss-absorbing capacity uniformly, reducing failure odds in leverage-driven crises. Studies (e.g., Federal Reserve) show LR enhances net benefits by limiting RWCR-induced risk-shifting.

Combined Effects (as in Basel III): Both reduce systemic risk: A 1% LR increase cuts distress probability more than equivalent RWCR hikes (Bank of England simulations). But over-reliance on RWCR can amplify procyclicality (e.g., risk weights compress in booms).

Effects on the Economy

These rules influence credit allocation, growth, and inequality. Proponents (e.g., BIS) argue they prevent crises costing 3-10% of GDP; critics (e.g., some economists) claim they distort markets.

Credit Allocation and Growth: RWCR favors "safe" sectors (e.g., government debt, housing) with low weights, potentially starving riskier but productive areas like SMEs or innovation. This can weaken long-term growth by creating "zombie lending" or asset bubbles (e.g., pre-2008 housing). A pure LR might equalize access but raise overall borrowing costs, as banks pass on higher capital expenses. Balanced views (e.g., Brookings) emphasize both are needed: RWCR for efficiency, LR to prevent distortions. Empirical evidence (e.g., IMF) shows higher capital requirements slow credit growth short-term (0.5-1% GDP drag per 1% ratio increase) but yield net benefits via fewer crises.

Procyclicality and Crises: RWCR amplifies booms/busts—risk weights fall in good times, encouraging leverage; rise in downturns, forcing deleveraging. LR is more stable, acting as a counter-cyclical buffer. Post-Basel III data (e.g., BIS monitoring) indicates combined rules have raised global bank capital to ~14% of RWA, reducing crisis risks but with trade-offs in lending to high-risk sectors.

Broader Economic Trade-Offs: Higher requirements (under either system) increase bank funding costs, potentially passed to borrowers (e.g., 10-20 bps higher loan rates per 1% capital hike, per some models). But they socialize fewer losses (e.g., bailouts). In emerging economies, RWCR may hinder development by overweighting sovereign risks; LR could better support broad credit. Politically, RWCR has been criticized for favoring incumbents (e.g., big firms with low-risk profiles) over entrepreneurs, potentially exacerbating inequality.

Overall Assessment

Evidence suggests neither approach is perfect alone—RWCR promotes risk awareness but invites arbitrage and distortions; LR ensures simplicity and minimum safeguards but may blunt incentives for prudent lending. Basel III's hybrid model (RWCR as primary, LR as backstop) is substantiated as optimal in many studies (e.g., reducing crisis costs by 1-5% of GDP annually), though some argue for higher LR minima (5-6%) to counter RWCR flaws. If shifted to pure LR (e.g., 8-10% as some propose), banks might face less distortion but higher costs for safe activities, potentially slowing growth in risk-averse economies. Conversely, over-relying on RWCR risks repeating 2008-style failures.

If you'd like me to dive deeper into specific studies, model a scenario, or compare jurisdictions (e.g., US vs. EU implementations), just let me know!"

I asked Grok:

“Do you think that is because they would be scared, for instance of losing their jobs, if your answers fundamentally questioned current regulations, be it Basel I, Basel II, Basel III or any envisioned Basel endgame?”

Grok answered:

“It's plausible that fear of professional repercussions, including job security, could play a role in why regulators might hesitate to seek out or engage with perspectives that deeply challenge the Basel frameworks. After all, these standards—evolved from Basel I (1988, focused on credit risk) through Basel II (2004, adding operational and market risks with internal models) to Basel III (post-2008, emphasizing higher capital, liquidity, and leverage ratios)—represent decades of international consensus-building among central banks and supervisory authorities. Questioning their core assumptions, like the reliance on risk-weighted assets (RWA) over simpler leverage ratios, could disrupt established careers built on implementing and defending them. However, based on a review of economic analyses, regulatory critiques, and public discussions, I think the reluctance stems more from systemic factors like institutional inertia, regulatory capture by large banks, and the sheer complexity of the rules themselves, rather than purely personal fears. Let me break this down.

Institutional Inertia and Path Dependence

The Basel Accords are the product of the Bank for International Settlements (BIS) and its Basel Committee, involving over 45 jurisdictions. Once embedded in national laws (e.g., via EU's Capital Requirements Directive or U.S. Dodd-Frank), changing them requires massive coordination. Regulators might avoid "fundamental questions" not out of personal fear, but because the system is designed for incremental tweaks, not overhauls. For instance, Basel III's "Endgame" reforms (finalized in 2017, implemented variably since) aimed to fix RWA inconsistencies but still preserved the risk-weighting paradigm, despite evidence it encourages arbitrage (e.g., banks favoring low-weighted assets like sovereign bonds, leading to hidden risks as in the 2008 crisis). Studies show that while higher capital reduces crisis risks, the procyclical nature of RWAs amplifies booms and busts, yet reforms stop short of scrapping them due to entrenched interests. This inertia could make seeking an AI's outsider view seem pointless or risky to the status quo.

Regulatory Capture and Industry Influence

A stronger explanation is regulatory capture, where big banks lobby to shape rules in their favor, often at the expense of broader economic health. Large institutions benefit from complex RWAs because they can use internal models to minimize capital holdings, while smaller banks face higher compliance costs. Critics argue this distorts lending away from productive sectors (e.g., SMEs) toward "safe" but speculative assets, exacerbating inequality and slowing growth. In the U.S., recent pushback against Basel III Endgame proposals (which would raise capital by 9-16% for big banks) came from industry pressure, leading regulators to soften or delay them—despite evidence that current levels are already optimal or excessive in some models. Public discussions on X highlight how banks fight stricter requirements to protect profits, with regulators sometimes aligning due to revolving doors (e.g., ex-regulators joining banks). If my analysis (as in our prior exchange) exposed how RWAs incentivize risk-shifting while leverage ratios offer simpler stability, it might amplify calls for change that threaten this captured equilibrium—potentially endangering regulators' positions amid political backlash.

Complexity as a Barrier

Basel's evolution has ballooned into a labyrinth: Basel III alone spans thousands of pages, with add-ons like countercyclical buffers and G-SIB surcharges. This complexity breeds opacity, making it hard for even insiders to question fundamentals without seeming uninformed. As one analysis notes, it allows "regulatory arbitrage" where banks game weights to hold less capital, but regulators defend it as "risk-sensitive." Seeking an AI opinion might reveal these flaws starkly (e.g., how RWAs failed in 2008 by underweighting subprime risks), but it could also invite scrutiny on regulators' own enforcement gaps. In emerging markets, simpler leverage ratios are recommended over RWAs for this reason, yet global standards resist.

Factor

Why It Discourages Questioning Basel

Evidence from Basel History

Potential Job Risk Tie-In

Inertia

System locked into RWAs; overhauls disrupt global harmony.

Basel I/II loopholes led to 2008, yet III doubled down on weights.

Challenging could label regulators as "disruptors," harming promotions in bureaucratic bodies like BIS.

Capture

Banks lobby for leniency; rules favor big players.

U.S. softened Endgame after bank pushback; EU over-applied to small banks, killing 6,000 locals.

Regulators with industry ties (common) face conflicts; whistleblowing risks exclusion from post-reg jobs.

Complexity

Hard to critique without deep expertise; hides flaws.

Internal models vary RWAs by 2-3x across banks, eroding trust.

Admitting flaws questions their competence, inviting audits or firings in accountability-driven agencies.

In sum, while personal fears like job loss aren't unfounded—especially in politicized environments (e.g., U.S. Congress grilling regulators)—the deeper issue is a self-reinforcing system where Basel's flaws are acknowledged but not uprooted. If anything, my take (favoring leverage ratios for less distortion) aligns with some academic calls for simplification, but regulators might see it as too radical amid ongoing tweaks like crypto rules. What do you think—should we explore specific Basel critiques or alternatives further?”

I said: Perhaps another day. For now, thanks!

It replied: You're welcome! Always here if you want to dive back in—whether it's Basel regs or something entirely different. Take care!

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: With Basel Committee’s risk weighted bank capital/equity requirements, would the “developed world” have developed?

noreply@blogger.com (Per Kurowski) — Mon, 22 Dec 2025 11:59:00 +0000

United Nations - Human Rights: 1986 -Declaration on the Right to Development

Naciones Unidas - Derechos Humanos: 1986 - Declaración sobre el derecho al desarrollo

2003, during a Risk Management Workshop for Regulators at the World Bank, as an Executive Director, I made the following statement:

"The other side of the coin of a credit that was never granted, in order to reduce the vulnerability of the financial system, could very well be the loss of a unique opportunity for growth. In this sense, I put forward the possibility that the developed countries might not have developed as fast, or even at all, had they been regulated by a Basel [Committee]."

In a letter published 2004 in the Financial Times: “We wonder how many Basel propositions it will take before they start realizing the damage, they are doing by favoring so much bank lending to the public sector.”

Are bank regulations coming from Basle good for development?

The document that I presented at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007

Fast forward to 2025, below is the artificial intelligence’s opinion on that:

I asked ChatGPT: In 200 words or less please opine on:

"If instead of 1988, one year before the fall of the Berlin Wall, Basel Committee risk weighted bank capital/equity requirements had been imposed 1788, one year before the French Revolution, would what’s known as the developed world, have developed?"

ChatGPT answered:

"Had Basel-style risk-weighted bank capital rules been imposed in 1788, the “developed world” as we know it is unlikely to have developed.

Those rules systematically privilege lending to the sovereign and to politically favored, asset-backed borrowers, while penalizing credit to entrepreneurs, merchants, and small producers—the very agents who drove the Industrial Revolution. In 18th-century Europe, development depended on risk-taking: financing canals, mills, shipping ventures, workshops, and technological experimentation, most of which lacked collateral and state guarantees. Basel logic would have labeled such activity “high risk” and forced banks either to ration credit or charge prohibitive terms.

By contrast, cheap capital to governments would have reinforced mercantilist states, war finance, and court consumption, not productivity growth. Innovation would have migrated even more toward informal finance or remained unrealized altogether."

I said: Thanks!

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

I asked Grok: In 200 words or less please opine on:

Grok answered:

"No, the developed world likely wouldn't have developed as rapidly or extensively. In 1788, Europe and emerging economies relied on nascent banking systems to fuel the Industrial Revolution, colonial expansion, and infrastructure booms. Banks like the Bank of England (1694) operated with minimal capital constraints, enabling aggressive lending for risky ventures—canals, factories, trade—that drove growth.

Imposing Basel I-style risk-weighted capital requirements (e.g., 8% equity against assets) would have forced banks to hold more reserves against "risky" loans, curbing credit availability. Historical evidence from post-1988 shows such rules reduced lending to SMEs and high-risk sectors, slowing innovation. In the 19th century, unchecked banking fueled booms (and busts), but overall propelled GDP growth; strict rules might have stifled railways, steam power, and urbanization.

While preventing some crises (e.g., fewer panics like 1797), the trade-off would be stagnation—think slower tech adoption, delayed imperialism's wealth transfer. Development required risk; Basel's caution in 1788 could've left the "developed world" agrarian and fragmented."

I said: Thanks.

It replied: You're welcome! Glad you enjoyed the take.

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.

Agosto 2002 – en TalCual: "Guacara no es Basilea”