Bernanke vs. the robo-banks

March 23, 2011, 11:26 PM UTC

Computers making lending decisions don’t sit well with Fed chief Ben Bernanke.

At least, that’s what he told community bankers Wednesday. Bernanke said the giant banks have fallen short of their duty to support local businesses by relying too much on statistical models and not enough on shaking a borrower’s hand and looking him in the eye.

Take me to your Fico score

The largest banks typically rely heavily on statistical models to assess borrowers’ capital, collateral, and capacity to repay, and those approaches can add value, but banks whose headquarters and key decisionmakers are hundreds or thousands of miles away inevitably lack the in-depth local knowledge that community banks use to assess character and conditions when making credit decisions. This advantage for community banks is fundamental to their effectiveness and cannot be matched by models or algorithms, no matter how sophisticated.

The IBM computer program Watson may play a mean game of Jeopardy, but I would not trust it to judge the creditworthiness of a fledgling local business or to build longstanding personal relationships with customers and borrowers.

Of course, Bernanke hasn’t always been such a keen tech skeptic. This from a 2005 speech:

The new Basel II international capital accord, which the Fed helped to design in collaboration with other banking regulators from the United States and around the globe, may well be the most economically sophisticated regulation scheme ever devised. The new system is designed to use information provided by the banks themselves about their loss experience, together with algorithms that mimic the most up-to-date risk-management techniques, to establish minimum capital standards for banks that approximate the appropriate level of economic capital. In addition, Basel II provides for enhanced supervisory oversight and public disclosure of financial information by banks. As many economists have noted, greater transparency on the part of financial institutions improves the efficiency with which financial markets price financial claims on banks, including equity and subordinated debt.

By aggregating private-sector information about banks’ financial condition, prices and yields determined in financial markets may in turn provide important information to regulators.

Or, as it happened, they may not. But when the facts change, Bernanke changes his mind. What do you do, sir?

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