Robert Bartlett’s new paper The Institutional Framework for Cost Benefit Analysis in Financial Regulation: A Tale of Four Paradigms? does the unthinkable. It goes totally meta and does a cost benefit analysis on the cost benefit analysis regimes of the financial regulators. This endeavor must be rewarded and propagated so that our minds may collectively be blown.
The paper very nicely describes the CBA regimes that apply to different financial regulators. I am a big fan of charts and Bartlett has a nice one laying out the four possibilities of CBA review for financial regulators:
The article first discusses the different dynamics of each CBA regime and then it asks what the costs and benefits are of having such varied applications of CBA to different agencies. This paper is not a CBA of conducting CBA for financial regulation (though I would love to see that paper too), but the CBA of having non-uniform CBA oversight of the financial regulators (still with me?). This is an interesting question because it builds on the ongoing debate about the costs and benefits of having different regulators of financial firms.
Bartlett names a few benefits of non-uniformity:
– Agencies have different objectives (contrast FDIC with SEC for example) and therefore might need a more or less quantitative CBA requirement that might correspond with their particular goals.
– Errors either introduced because of agency bias or complexity of subject matter are better spotted by judicial review in the former and OIRA review in the latter and having both might lead to better error detection.
– Because agency jurisdictions overlap with regards to certain rules (Volcker Rule is one example), the most rigorous CBA review might well attach to all the regimes even when not required thereby leading to agency paralysis. Bartlett shares this anecdote:
A 2012 lecture at the University of California, Berkeley School of Law by Judge Douglas Ginsburg (2012) suggested just this phenomenon during a discussion of his Business Roundtable v. SEC opinion. When asked how he would advise the SEC to conduct its CBA in the future, Judge Ginsburg responded that the SEC should look to the EPA for guidance. The fact that EPA’s OIRA-level CBA has come to represent for Judge Ginsburg a model of CBA for the SEC highlights the way in which CBA done under an entirely different CBA paradigm can quickly become the benchmark by which all agencies will be judged. To the extent judges adopt this view, even a rule that complies fully with an agency’s own organic CBA might thus be perceived to be lacking in legitimacy (and thus, deserving of a judicial rebuke) when compared to the more elaborate CBA conducted in a more demanding CBA paradigm.
Bartlett also runs through the costs and benefits of a uniform system and concludes that such a system would be preferable. That system, he says, should look more like OIRA review than judicial review and could even be administered by OIRA itself.
Though I am not fully convinced of the utility of OIRA CBA review in general and specifically CBA review as it applies to financial regulation, I am a fan of this sort of analysis. The financial regulatory structure being a product of historic accidents and political deals is hardly the most optimal system of regulation. And the regulations that emerge from this system can be both onerous (talk to any community banker about Dodd-Frank compliance) and completely miss the point (AIG’s derivatives dealings were essentially under the supervision of 0 federal regulators). FSOC makes an attempt at uniformity and is theoretically supposed to take a forest-through-the-trees view of everything. This article and the streamlining of review it encourages is a great start in that process.