Why Should Regulators Apply Cost-Benefit Analysis to Financial Regulation?

From: RegBlog/University of Pennsylvania

When the D.C. Circuit Court of Appeals struck down the U.S. Securities and Exchange Commission’s (SEC) proxy access rule in 2011, it cited the agency’s failure to provide a rigorous cost-benefit analysis. Critics of that court decision argued that it created a burdensome new standard that would destroy the SEC’s ability to issue regulations.

Of course, critics of cost-benefit analysis advanced that very same argument in 1981 when President Ronald Reagan issued an executive order making cost-benefit analysis a central tool of regulatory decision-making. More than three decades later, the U.S. Environmental Protection Agency (EPA), the Occupational Safety and Health Administration (OSHA), and the National Highway Traffic Safety Administration (NHTSA) widely apply cost-benefit analysis to regulations with an expected annual economic impact of $100 million or more, and these and other federal agencies have issued hundreds of regulations supported by cost-benefit analysis over the years. If cost-benefit analysis has become the standard for decision-making about environmental, health and safety regulation, why not use it for financial regulation?

Drawing on the work of a conference on cost-benefit analysis for financial regulation held in October 2013, the University of Chicago’s Eric Posner and Glen Weyl build a case for applying cost-benefit analysis to financial regulation in a recent paper. Although President Obama’s Executive Order 13579 does not require independent agencies—including the majority of financial regulators—to conduct cost-benefit analysis, Posner and Weyl argue that applying cost-benefit analysis to financial regulation would improve transparency and accountability, limit gaming, ensure consistent agency decision-making, and cool ideological battles. They propose a framework outlining how agencies could apply cost-benefit analysis to financial regulation. Ultimately, the authors recommend that the Office of Information and Regulatory Affairs institutionalize cost-benefit analysis principles for financial regulators and bring financial regulatory agencies under its supervision.

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