AI tool predicts when a bank should be bailed out
An artificial intelligence tool developed by researchers at UCL and Queen Mary University of London could help governments decide whether or not to bail out a bank in crisis by predicting if the intervention will save money for taxpayers in the long term.
The AI tool, described in a new paper in Nature Communications, assesses not only if a bailout is the best strategy for taxpayers, but also suggests how much should be invested in the bank, and which bank or banks should be bailed out at any given time.
The algorithm was tested by the authors using data from the European Banking Authority on a network of 35 European financial institutions judged to be the most important to the global financial system, but it can also be used and calibrated by national banks using detailed proprietary data unavailable to the public.
Dr Neofytos Rodosthenous (UCL Mathematics), corresponding author of the paper, said: “Government bank bailouts are complex decisions that have financial, social and political implications. We believe the AI approach we have developed can be an important tool for governments, helping officials assess specifically financial implications — this means checking if a bailout is in the best interest of taxpayers, or whether it would be better value for money to let the bank fail. Our techniques are freely available for banking authorities to use as tools in their decision-making process.”
Co-author Professor Vito Latora (Queen Mary University of London) added: “Governments and banking authorities can also use our approach to retrospectively review past crises and gain valuable learnings to inform future actions. One could, for example, review the UK government bailout of the Royal Bank of Scotland (RBS) during the financial crisis of 2007-9 and reflect on how this could potentially be improved (from a financial standpoint) in the future in order to primarily benefit taxpayers.”
In a bank bailout, a government investment in a bank increases the bank’s equity and reduces its risk of defaulting. This cost in the short term may be justified to the taxpayer if it leads to lower taxpayer losses in the long term — i.e., it prevents bank defaults that are more damaging to government finances. More