Cost-Benefit Analysis of Financial Regulation: An Institutional Perspective
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Description
Recent legal scholarship has focused on the feasibility of performing quantified cost–benefit analysis of financial regulations. An issue of the Yale Law Journal, published in January 2015, compellingly presents the competing positions. John C. Coates IV conducted case studies attempting to apply cost–benefit analysis to six representative financial regulations and concluded that “precise, reliable, quantified” analysis is currently “unfeasible” and as such there should be a moratorium on new cost-benefit requirements until agencies boost their analytical capacities. Eric A. Posner and E. Glen Weyl rebut Coates’s arguments that the financial sector poses a unique challenge for cost–benefit analysis and argue that the nature of finance actually makes it highly suitable for quantified analysis. Similarly, Cass Sunstein argues that “[t]here is no obvious reason . . . that financial regulation cannot be subject to [cost–benefit] analysis.” This chapter focuses on the institutional issues underlying this debate, arguing that the current structural arrangements for conducting cost–benefit analyses of financial regulation are clearly suboptimal. The independent agencies that have primary responsibility for financial regulation lack the capability to conduct cost–benefit analyses of the quality that is commonplace in the Executive Branch, in part as a result of the role of the Office of Information and Regulatory Affairs (OIRA). The shortcomings of the cost–benefit analyses prepared by the financial regulatory agencies are ominous in light of the Supreme Court’s recent decision in Michigan v. EPA. In this case, the Court invalidated a rule by the Environmental Protection Agency (EPA) on the ground that the agency had not considered costs in making the statutory determination that the rule was “appropriate and necessary.” These terms are commonplace in statutes that delegate rulemaking authority to financial regulators. For example, the governing statute of the Securities and Exchange Commission (SEC) requires agency rulemakings “to consider or determine whether an action is necessary or appropriate in the public interest.” Similarly, the Dodd–Frank Wall Street Reform and Consumer Protection Act uses “necessary or appropriate” or “necessary and appropriate” language eighty times in a variety of contexts. As a result, the requirement that the financial regulatory agencies engage in cost-benefit analysis is now likely to become more prevalent. Focusing on the institutional reforms necessary to improve the quality of the cost–benefit analyses performed by financial regulatory agencies is therefore an important challenge for the administrative state. Section I uses three case studies to illustrate the shortcomings of independent agencies with respect to cost–benefit analysis. The first involves efforts by the Nuclear Regulatory Commission (NRC) to update its estimate of the Value of a Statistical Life (VSL). The other two deal with key financial regulators: the adoption by the SEC of OIRA’s approach to cost–benefit analysis, though only after having some significant regulations struck down by the D.C. Circuit; and the request by the Commodity Futures Trading Commission (CFTC) that OIRA provide it with technical assistance. Section II focuses on institutional changes designed to improve the quality of the cost–benefit analyses prepared by the financial regulatory agencies. Possible improvements include expanding the role for the Financial Stability Oversight Council (FSOC), granting OIRA a formal role in the review of the cost-benefit analyses supporting regulatory action, and enhancing the economics capabilities of individual agencies. In each of these cases, the Executive Branch provides good models for independent agencies to emulate. I am honored to have been invited to prepare this chapter for a conference honoring the work of Jerry L. Mashaw. Like much else in modern American administrative law, the themes in this chapter were explored by Professor Mashaw decades ago. For example, in Improving the Environment of Agency Rulemaking: An Essay on Management, Games, and Accountability, he stressed the “need to reconsider the structure of agency rulemaking as a mechanism of governance,” separate from its “substantive effects in particular instances.” In this connection, he urged a shift “toward macro-political accountability for bureaucratic policymaking,” as in the form of “structures that placed policy accountability clearly at the doorstep of the Chief Executive,” and lamented that “Congress seems destined . . . to leave the independent agencies outside the ambit of any accountability structure.” Professor Mashaw defined an extraordinary rich agenda for academics to follow.
Source Publication
Administrative Law from the Inside Out: Essays on Themes in the Work of Jerry L. Mashaw
Source Editors/Authors
Nicholas R. Parrillo
Publication Date
2017
Recommended Citation
Revesz, Richard L., "Cost-Benefit Analysis of Financial Regulation: An Institutional Perspective" (2017). Faculty Chapters. 1930.
https://gretchen.law.nyu.edu/fac-chapt/1930
