Sending Firm Messages: Text Mining Letters from PRA Supervisors to Banks and Building Societies They Regulate

57 Pages Posted: 9 Nov 2017 Last revised: 15 Nov 2017

See all articles by David Bholat

David Bholat

University of Essex

James Brookes

Bank of England

Chris Cai

Bank of England

Katy Grundy

Bank of England

Jakob Lund

Bank of England

Date Written: October 27, 2017

Abstract

Our paper analyses confidential letters sent from the Bank of England’s Prudential Regulation Authority (PRA) to banks and building societies it supervises. These letters are a ‘report card’ written to firms annually, and are arguably the most important, regularly recurring written communication sent from the PRA to firms it supervises. Using a mix of methods, including a machine learning algorithm called random forests, we explore whether the letters vary depending on the riskiness of the firm to whom the PRA is writing. We find that they do. We also look across the letters as a whole to draw out key topical trends and confirm that topics important on the post-crisis regulatory agenda such as liquidity and resolution appear frequently. And we look at how PRA letters differ from the letters written by the PRA’s predecessor, the Financial Services Authority. We find evidence that PRA letters are different, with a greater abundance of forward-looking language and directiveness, reflecting the shift in supervisory approach that has occurred in the United Kingdom following the financial crisis of 2007–09.

Keywords: Bank of England Prudential Regulation Authority, Banking Supervision, Text Mining, Machine Learning

JEL Classification: C55, C80, E58, G28

Suggested Citation

Bholat, David and Brookes, James and Cai, Chris and Grundy, Katy and Lund, Jakob, Sending Firm Messages: Text Mining Letters from PRA Supervisors to Banks and Building Societies They Regulate (October 27, 2017). Bank of England Working Paper No. 688, Available at SSRN: https://ssrn.com/abstract=3066809 or http://dx.doi.org/10.2139/ssrn.3066809

David Bholat (Contact Author)

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

James Brookes

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Chris Cai

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Katy Grundy

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jakob Lund

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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