Featured Product

    BoE Paper Examines Linguistic Complexity in Banking Regulations

    October 24, 2019

    BoE published a paper that discusses a study on the textual complexity of banking regulations post the financial crisis of 2007-08. The authors have attempted to interpret regulatory complexity in terms of processing complexity by using techniques from natural language processing, or NLP, and network analysis and applying these techniques to the new post-crisis international banking rules. The results of the study suggest that the linguistic complexity in banking regulation is concentrated in a relatively small number of provisions and the post-crisis reforms have accentuated this feature.

    The paper covers the ultimate normative question: “How complex does bank regulation have to be?” However, before this, there is another question: “How complex is bank regulation?” This study provides evidence to help answer this question by calculating textual complexity indicators on the near universe of UK prudential rules. The dataset used for this study captures legal sources comprehensively, allows like-for-like comparison between the post- and pre-crisis frameworks, and captures the entire structure of cross-references within the regulatory framework (to facilitate network analysis). The dataset included the near universe of prudential legal obligations and supervisory guidance that applied to UK banks in 2007 and 2017. It captured changes in both the scope of what regulators seek to control and in the legal architecture.

    In this paper, the authors define complexity in terms of the processing difficulty encountered when comprehending a particular linguistic unit—for example, a single regulatory provision. Dimensions of processing difficulty for a provision include its length, lexical diversity, use of conditional statements, and the overall readability of its sentences (defined as “local” complexity). Some processing difficulties can only be resolved after accessing information outside the immediate context of the provision—for instance, cross-references or regulatory precedents needed to understand a provision’s intent (“global” complexity). The authors use natural language processing and network analysis techniques to measure these dimensions of local and global complexity and apply these measures to the constructed dataset.

    The study found that linguistic complexity in banking regulation is concentrated in a relatively small number of provisions. Starting from the simplest provisions, the measures of complexity increase slowly, but then pick up rapidly as the study approaches the last 10% of most complex provisions. This stylized fact has been accentuated by the post-crisis reforms, which have resulted in the rise of highly complex provisions, in particular a tightly connected core. The authors recognize that more benchmarking for these indicators is a necessary next step toward answering the question on how complex does bank regulation have to be. Benchmarking against non-financial regulatory frameworks, or frameworks in other jurisdictions, is challenging given differences in legal systems and policy substance. However, authors plan to exploit variation within the used dataset to compare changes in complexity measures for different policy standards and test how they correspond to the expectations of policymakers.

    The authors stress that these measures do not exhaust all the dimensions of linguistic complexity—in particular, resolving ambiguity in regulation is very likely to be important for information burden. In addition, to understand the economic effect of regulatory complexity “soft” textual information needs to be combined with traditional “hard” numeric data. For example, textual regulatory complexity could be compared to balance sheet complexity. Eventually, natural language processing can help enrich the economic evaluation of rules in terms of the interaction between rules, the impact of linguistic complexity, and the effectiveness of “rules vs standards.” The study contributes to this long-term research agenda, by creating a dataset of all provisions for UK banks and analyzing how they have changed with post-crisis reforms. 

     

    Related Link: Staff Working Paper

    Keywords: Europe, UK, Banking, NLP, Machine Learning, Machine-Readable Regulations, Artificial Intelligence, Regtech, BoE

    Related Articles
    News

    APRA Updates Validation and Derivation Rules in September 2020

    APRA updated the lists of the Direct to APRA (D2A) validation and derivation rules for authorized deposit-taking institutions, insurers, and superannuation entities.

    September 24, 2020 WebPage Regulatory News
    News

    EC Proposes Frameworks for Crypto-Assets and Operational Resilience

    EC adopted a package that includes the digital finance and retail payments strategies and the legislative proposals for regulatory frameworks on crypto-assets and digital operational resilience.

    September 24, 2020 WebPage Regulatory News
    News

    ECB Publishes Opinion on Proposals to Amend Securitization Framework

    ECB published an opinion (CON/2020/22) on proposals for regulations amending the securitization framework of EU, in response to the COVID-19 pandemic.

    September 24, 2020 WebPage Regulatory News
    News

    FCA Consults on Regulation of International Firms in UK

    FCA is consulting on its approach to the authorization and supervision of international firms operating in UK.

    September 23, 2020 WebPage Regulatory News
    News

    MAS Amends Notice on Capital Adequacy Requirements of Banks

    MAS published amendments to Notice 637 on the risk-based capital adequacy requirements for reporting banks incorporated in Singapore.

    September 23, 2020 WebPage Regulatory News
    News

    FCA to Begin to Move Firms to New Data Collection Platform RegData

    FCA announced that it will move firms to RegData from Gabriel in the coming months in stages, based on the reporting requirements of firms.

    September 23, 2020 WebPage Regulatory News
    News

    ISDA Expects IBOR Fallbacks to be Effective by End of January 2021

    ISDA issued a letter to regulators to flag that it now expects the supplement to the 2006 ISDA Definitions and the Interbank Offered Rate (IBOR) Fallbacks Protocol to be effective around mid- to late-January 2021.

    September 23, 2020 WebPage Regulatory News
    News

    APRA Reviews Repayment Deferral Plans, Identifies Best Practices

    APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.

    September 22, 2020 WebPage Regulatory News
    News

    ESAs Assess Risks to Financial Sector After COVID-19 Outbreak

    ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.

    September 22, 2020 WebPage Regulatory News
    News

    BoE Confirms Withdrawal of COVID Corporate Financing Facility

    BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.

    September 22, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5836