Cost-Benefit Analysis and Financial Regulator Rulemaking

Summary

Cost-benefit analysis (CBA) in the federal rulemaking process is the systematic examination, estimation, and comparison of the potential economic costs and benefits resulting from the promulgation of a new rule. Agencies with rulemaking authority implement regulations that carry the force of law. While this system allows technical rules to be designed by experts that are to some degree insulated from political considerations, it also results in rules being implemented by executive branch staff that arguably are not directly accountable to the electorate.

One method for Congress to increase accountability is to require the regulators to conduct analyses of likely effects of proposed regulations. In this way, an agency demonstrates that it gave reasoned consideration to the effects of the proposed rules. CBA is an important type of such analysis, as comparing costs and benefits can be useful in determining whether or not a regulation is beneficial. However, performing CBA can be a difficult and time-consuming process, and it produces uncertain results because it involves making assumptions about future outcomes. Some observers argue that financial regulation CBA is particularly challenging. This raises questions about what parameters and level of detail agencies should be required to include in their CBA.

While most federal regulatory agencies are directed by Executive Order 12866 and Office of Management and Budget Circular A-4 in their performance of CBAs, financial regulators are generally not subject to these directives. Financial regulators are statutorily required to perform certain CBA: requirements such as the Paperwork Reduction Act (P.L. 104-13) and Regulatory Flexibility Act (P.L. 96-354) generally apply to all financial regulators; financial regulators that regulate the banking system are subject to requirements set out in the Riegle Community Development and Regulatory Improvement Act (P.L. 103-325); and agencies such as the Securities and Exchange Commission (SEC), the Consumer Financial Protection Bureau (CFPB,) and the Commodities Futures Trading Commission (CFTC) face requirements specific to them. However, the requirements facing individual financial regulators generally allow them to perform analysis under less specific instruction than is contained in the requirements that are cited above and apply to nonindependent regulatory agencies.

Whether the requirements facing financial regulators should allow for this discretion is a contentious issue. Some observers assert that financial regulators should maintain a relatively high degree of discretion over when and how to conduct CBA. They argue that characteristics of the financial industry and regulation make CBAs in this area especially uncertain and contestable, and assert that financial regulation effects depend entirely on human and market reactions; finance plays a central role in a huge, complex economic system; and financial regulations’ effects are more likely (relative to other types of regulation) to include transfers between groups not well accounted for in net measurements. They further argue that requisite CBAs that are uncertain and contestable are more likely to disguise agency discretion as objective fact and provide the opportunity for interested parties to challenge socially beneficial regulation with their own subjective, self-interested analyses.

Other observers assert that financial regulators should face more stringent requirements than they currently do. They refute claims that financial CBAs are necessarily more uncertain or contestable than in other areas. Also, they argue that tools and techniques would be developed to overcome challenges if CBAs were required. They further argue that even uncertain and contestable CBAs are effective in disciplining agencies because they create transparency of the agency’s evaluations of proposed regulations and allow for outside assessment of that evaluation.

Recent Congresses have been active on this issue, and the House has passed several bills in the 115th Congress that would increase CBA requirements. Recent proposals would affect either all regulators including financial regulators, financial regulators as a group, or individual financial regulators.