Is mixing politics and bank regulations dangerous?

I asked ChatGPT: 

"What would you opine of risk weighted bank capital requirements with risk weights assigned for political reasons?"


ChatGPT answered:

"Assigning risk weights for political reasons in risk-weighted bank capital/equity requirements would be inappropriate and potentially dangerous. This is because risk-weighted capital requirements are intended to be based on objective assessments of the riskiness of different types of assets, such as loans or investments.

If risk weights are assigned for political reasons, it could lead to a distortion in the allocation of credit and investment, and increase the likelihood of losses for banks and ultimately taxpayers. For example, if political pressure is used to assign lower risk weights to certain types of loans or investments, it could encourage banks to engage in excessive lending or investment in those areas, even if the risks are not properly assessed.

Furthermore, assigning risk weights for political reasons could erode confidence in the regulatory framework and lead to a loss of trust in the financial system as a whole. This could have serious consequences for financial stability and economic growth.

Therefore, it is important that risk-weighted capital requirements are based on objective assessments of risk and not influenced by political considerations. This can help ensure that the regulations are effective in promoting financial stability and minimizing risks to the banking system."


My note: “Assets assigned lowest risk, for which bank capital requirements were nonexistent or low, what had most political support: sovereign credits and home mortgages. A ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker

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