June 11, 2014

Our young unemployed, in order not to become a lost generation, might depend on artificial intelligence entering the Basel Committee.

Sir, though the theme was in general quite worrisome for a human, there was at least some source of hope when reading that Anjana Ahuja believes “Thinking machines are ripe for a global takeover” June 11.

Any remotely smart machine, if invited into the Basel Committee, would immediately detect two major flaws with the risk-weighted capital requirements which is the pillar of current bank regulations.

First, by simply looking at empirical data and observe that all major bank crisis have always resulted from excessive exposures to what was ex ante perceived as “absolutely safe”, and never ever because of excessive bank exposures to what was ex ante perceived as “risky”; it would conclude in that the risk-weights of 0 to 20 percent for the “infallible sovereigns” and the AAAristocracy must have gotten mixed up with the 100 percent risk weights for the medium and smaller businesses, entrepreneurs and start-ups.

Secondly it would probably also ask the human regulators why they were looking at perceived risks that were already being cleared for by the bankers, by means of interest rates size of exposure and other, something which is bound to distort the allocation of credit in the real economy; and why they were not looking instead at some of the important though usually ignored risks, like that of the credit risks not being correctly perceived by bankers and credit rating agencies.

If so, and if the Basel Committee did not throw the thinking machine out, and in all modesty accepted their natural intelligence was not sufficient and proceeded to correct those mistakes… then perhaps our current unemployed young would not have to become a lost generation.

PS. And of course FT will also find it much easier and digestible to believe in “Eugene Goostman” the machine, than to believe in Per Kurowski the human.