The Case for Cost-Benefit Analysis of Financial Regulations

February 13, 2014

Financial regulatory agencies do not use cost-benefit analysis in evaluating regulations, say Eric A. Posner, the Kirkland and Ellis Distinguished Service Professor of Law at the University of Chicago, and E. Glen Weyl, an assistant professor of economics at the University of Chicago.

  • It is standard practice for federal agencies to use cost-benefit analysis (CBA) in assessing regulations.
  • But oddly, U.S. financial agencies -- the Securities and Exchange Commission (SEC), the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), etc. -- do not use CBA at all.

Two senators have introduced a bill that would require CBA and end what Posner and Weyl call a "bizarre anomaly in our regulatory system," but financial regulators have expressed concerns.

  • In 1981 President Reagan issued an executive order requiring agencies to use CBA in assessing regulations with at least a $100 million annual impact.
  • Such analysis requires a cost justification of any regulatory proposal, intended to ensure that costs do not outweigh the benefits.
  • However, Reagan's order did not apply to "independent" agencies (those with agency heads that can only be removed by the president for cause), which the SEC, the Federal Reserve and the FDIC all are.

These independent financial agencies should be required to use CBA. In addition to the obvious -- that such a requirement keeps regulatory costs from outweighing the benefits -- CBA would improve transparency, as regulators would have to explain to the public exactly what their assumptions are behind proposed regulations. And bringing such numbers into an evaluation of a potential measure would move a rhetorical debate into actual figures.

Of course, CBA is not perfect: agencies will sometimes exaggerate benefits and underestimate costs. But CBA has improved the regulatory process in all of our federal agencies, and those same improvements can -- and should -- be had in the financial sphere.

Source: Eric A. Posner and E. Glen Weyl, "The Case for Cost-Benefit Analysis of Financial Regulations," Regulation Magazine, Winter 2013-2014.

 

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