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Look Before You Regulate: Measuring the Costs of Financial Rules

Posted By David C. John On September 28, 2011 @ 11:30 am In Economics | Comments Disabled

You would think that any regulation that could affect a major part of the economy and cost industry and/or consumers millions of dollars to comply with would be based on rigorous and consistent economic analysis. After all, how else would regulators know the actual effect of their proposals and whether the proposed solution at least equals compliance costs?

Unfortunately, this level of economic analysis is not required for most financial regulatory agencies, which have been swamped trying to issue all of the hundreds of rules required by the Dodd–Frank bill. The act imposed unrealistic guidelines that the financial regulators have tried to meet, the result being a series of poorly considered, unrealistic proposals. In most cases, the economic analysis that is supposed to quantify the cost and benefits of the proposed regulations has been of such poor quality as to be worthless.

Proposed regulations by the Securities and Exchange Commission (SEC) are required to include an economic analysis that provides a clear justification for the new requirements that includes the economic impact and cost of compliance. As a result, earlier this year a federal court struck down [1] a proposed SEC rule requiring corporations to provide certain shareholder groups that wish to nominate director candidates access to their proxy statements, stating [2] that the economic analysis supporting the draft regulations failed to measure the cost of the rule to companies.

Requiring that any proposed regulation be accompanied by substantive economic analysis, including a cost-benefit analysis, would reduce the number of poorly considered regulations.

Senator Richard Shelby (R–AL) wants to impose just such a standard on the financial regulators and would go a step further by also requiring new rules to include a study of its impact on both economic growth and jobs. His new bill, the Financial Regulatory Responsibility Act [3], would also block rules where the compliance costs exceeds its benefits:

The Financial Regulatory Responsibility Act of 2011 would ensure that all financial regulators conduct comprehensive and transparent economic analysis in advance of adopting new rules. This analysis will help regulators and the public think through what each rule is intended to accomplish and what the costs of achieving those objectives are. It sets forth the factors that agencies must consider in their analysis, allows the public to comment, and requires the agency to revisit the effectiveness of the rule five years after it takes effect. The bill would also establish a council of chief economists to bolster the quality of economic analysis being conducted and to ensure that the financial regulators work together to understand the aggregate effects that financial regulations are having on the economy. Through a judicial review mechanism, the bill would ensure that the agencies take their new economic analysis requirements seriously. Finally, the bill would mandate that a rule does not take effect if its costs outweigh its benefits.

This type of economic analysis should have been required for all regulations, financial or otherwise, for the last several decades. The fact that it is not explains many of the regulations that have appeared and been implemented over the last several years. Shelby’s efforts to apply it to financial regulators is a good step toward less regulatory burden and would force those agencies to consider implementation strategies that reduce the cost that business must bear. The next step should be to impose this requirement on all regulators.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/09/28/look-before-you-regulate-measuring-the-costs-of-financial-rules/

URLs in this post:

[1] a federal court struck down: http://www.pionline.com/article/20110722/REG/110729959

[2] stating: http://www.cadc.uscourts.gov/internet/opinions.nsf/89BE4D084BA5EBDA852578D5004FBBBE/$file/10-1305-1320103.pdf

[3] Financial Regulatory Responsibility Act: http://shelby.senate.gov/public/index.cfm/newsreleases?ContentRecord_id=df5330c4-80f7-479b-b6a3-c0b8e7d138be

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