The language of rules: textual complexity in banking reforms

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 24 October 2019

Staff Working Paper No. 834 

By Zahid Amadxarif, James Brookes, Nicola Garbarino, Rajan Patel and Eryk Walczak

The implementation of Basel III banking reforms that followed the financial crisis of 2007–08 led to an increase in UK banking regulation from almost 400,000 to over 720,000 words. These reforms have also led to concerns about the complexity of financial regulation. However, the debate lacks clarity on: (1) how to measure this complexity; and (2) the extent to which technology can be used to address it. We restrict our analysis to cognitive costs related to language processing, and construct a new textual dataset of the prudential rules that applied to UK banks before and after the Basel reforms. We use natural language processing and network analysis to calculate complexity measures on this novel dataset. We find that, while the language of individual rules remained stable, suggesting a continuity in drafting style, rules became more interconnected, via longer chains of cross-references. In following these chains, the number of words that a reader had to process starting from a single rule increased from about 600 words to over 25,000 on average (an increase of over 4,000%). We also contribute to developing textual measures that can help identify rules that are complex for humans but require limited interpretation and are better suited for translation into machine-readable code.

This version was updated in November 2021.

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