Staff Working Paper No. 688
By David Bholat, James Brookes, Chris Cai, Katy Grundy and Jakob Lund
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.
Download PDF