Subscribe Subscribe   Find us on Twitter Follow POL on Twitter  



The Need for Economic Analysis in Financial Regulation

| No Comments

The Chamber of Commerce released a new report on Tuesday on the importance of cost-benefit analysis in financial regulation. It makes the point that such analysis is essential in the context of the massive Dodd-Frank rulemaking effort:

Cost-benefit analysis provides a regulatory template designed to ensure that, despite the accelerated pace, regulators will not cut corners but will engage in more rational decision-making, will produce better regulations, and will promote good governance.

I made a similar point in a recent paper about the federal financial regulators' failure to use economic analysis. Economic analysis is not, I explained, a burden, but an important tool for regulators to think about and convey to the president, Congress, and the public the problems regulators are trying to solve, the alternative solutions they are considering, the costs that society will bear under each alternative, and the benefits society can expect to enjoy as a result of regulatory actions.

Professors Paul Rose and Christopher Walker argue convincingly in the Chamber report that there is not a good alternative for using cost-benefit analysis in rulemaking. The "efficiency, rigor, and transparency afforded by cost-benefit analysis" is preferable to "an alternative regulatory model in which financial regulators promulgate rules without regard to their economic effects."

Their conclusion that economic analysis can and should be done by financial regulators received support at Tuesday's Senate Banking Committee nominations hearing. First, in her prepared testimony, Mary Jo White, the President's nominee to be chairman of the Securities and Exchange Commission, pledged to "ensure that the SEC performs robust analysis in connection with its rules." She explained that:

the SEC should seek to assess, from the outset, the economic impacts of its contemplated rulemaking. Such transparent and robust analysis, including consideration of the costs and benefits, will help ensure that effective and optimal solutions are achieved without unnecessary burdens or competitive harm.

Also at Tuesday's hearing, Senator Warren opined that, while it is difficult to assess costs related to enforcement, "it's fairly easy to measure the costs of implementing a regulation." Ms. Warren's statement is an important rejoinder to the oft-repeated criticism that regulatory impact analysis is particularly difficult to conduct for financial regulations.

Once financial regulators embrace the usefulness of economic analysis as a regulatory tool, they will be able to use it to think through problems, develop workable solutions, and explain those solutions to others.

Leave a comment

Once submitted, the comment will first be reviewed by our editors and is not guaranteed to be published. Point of Law editors reserve the right to edit, delete, move, or mark as spam any and all comments. They also have the right to block access to any one or group from commenting or from the entire blog. A comment which does not add to the conversation, runs of on an inappropriate tangent, or kills the conversation may be edited, moved, or deleted.

The views and opinions of those providing comments are those of the author of the comment alone, and even if allowed onto the site do not reflect the opinions of Point of Law bloggers or the Manhattan Institute for Policy Research or any employee thereof. Comments submitted to Point of Law are the sole responsibility of their authors, and the author will take full responsibility for the comment, including any asserted liability for defamation or any other cause of action, and neither the Manhattan Institute nor its insurance carriers will assume responsibility for the comment merely because the Institute has provided the forum for its posting.

Related Entries:



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.