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The Senate Banking Committee's first look at regulatory relief for small institutions provided key insights into how the panel is likely to tackle the topic legislatively this year, suggesting it could be a long and contentious debate.
February 10
WASHINGTON Lawmakers are working to craft a Dodd-Frank regulatory relief bill this spring, but a potential provision to require regulators to engage in more cost-benefit analysis could derail any hopes for a bipartisan deal.
House Republicans have already pushed through several bills that would require regulators, including the banking agencies, to adopt procedures for measuring the costs and benefits of new rules, something that would open them up to more challenges in court.
The issue has also come up in the Senate, where Banking Committee Chairman Richard Shelby repeatedly asked witnesses about the need for better accounting of costs and benefits during regulatory relief hearings last month. But Democrats are wary of that idea because they believe it is an attempt to delay or roll back regulations.
The push has raised some early questions about whether the divisive topic could jeopardize work on a bipartisan package of financial reforms later this year.
"I worry that Republicans are going to shoot for the moon and not even get off the ground," said Isaac Boltansky, an analyst at Compass Point Research & Trading. "Cost-benefit analysis is one of many potholes, but it's a pretty significant pothole."
Shelby is a long-time advocate for more stringent cost-benefit analysis requirements, and he's introduced legislation several times in recent years that would stop financial regulators from finalizing rules where the costs outweigh the benefits. The legislation would also direct regulators to estimate the costs and benefits of a rule before it's proposed and mandate a review of a rule's economic impact within five years after it's finalized. Chief economists at the banking agencies would be required to submit a combined annual report to Congress on their activities.
"Shelby has a lot of interest and respect for economists," said Mark Calabria, director of financial regulation studies at the Cato Institute, and a former Shelby staffer. "He's not coming at this from an industry perspective let's create roadblocks for regulators. He thinks we need to get better analysis in place to have rules that are better informed, rules where the benefits exceed the costs."
Last month, Shelby said that he hoped to pursue legislation on the cost-benefit issue as part of the broader push for regulatory relief.
"We're laying the groundwork for that," he told reporters. "I think [regulators for] financial institutions, and I'd go a step further and say any regulatory body ... it should be mandatory that they consider cost-benefit analysis before they put forth a regulation."
The banking panel has scheduled additional hearings this month on raising a key $50 billion threshold in Dodd-Frank and reforms to the Federal Reserve and the Financial Stability Oversight Council.
The Alabama Republican is aiming to hold a committee vote on legislation in mid-April, a spokeswoman for the committee said. She added that the hearings held so far and those coming later this month will form the basis for that bill.
But the issue of cost-benefit analysis remains a nonstarter for many Democrats and some regulators, who view the effort as part of a bigger push to undermine the rule-writing process. President Obama has threatened to veto House legislation aimed at putting new burdens on regulators, indicating that the White House would pose another political hurdle.
"While it's an important issue that needs to be addressed on a macro level, on a micro level it can be an impediment to bipartisan progress," said Dan Crowley, a partner at K&L Gates. "Even if Democrats are sympathetic to a particular unintended consequence and are inclined to be helpful in pursuing a resolution, when the discussion comes around to cost-benefit analysis, that tends to be very polarizing."
The issue is likely to come down to whether Democrats unite against language establishing new cost-benefit requirements, and whether the chairman is willing to go to the mat over such a mandate.
"It's not clear to me how hard he's going to fight for this the question is, does he let any deal get blown up for this? I suspect probably not," said Calabria.
The vote could end up being a tough one for moderate Democrats who are anxious to see some other changes to Dodd-Frank put into place, particularly those reducing the burdens on community banks. Sen. Sherrod Brown, D-Ohio, the ranking member on the banking panel, has raised questions about the push for additional cost-benefit analysis, but a spokeswoman declined to comment further.
Independent regulators aren't broadly required to follow the same rules facing executive agencies on conducting cost-benefit analyses, though officials have argued that the financial agencies often take into account similar factors when they're writing various rules.
Still, the issue is politically difficult, because the overarching concept of thinking about the costs and benefits of regulation sounds sensible, though significant challenges often remain in the execution.
"The idea of rigorous cost-benefit analysis is like motherhood and apple pie which means Democrats will have a hard time explaining why it should not be determinative," said Aaron Klein, director of the Bipartisan Policy Center's financial regulatory reform initiative. "Cost-benefit analysis is great in theory, and where practicable it should be implemented, but the challenge is to find where it works in the real world and where quantifiable analysis is not possible and cost-benefit analysis doesn't make sense."
Critics of the push for greater cost-benefit requirements argue that such estimates can provide a false sense of precision when data is often based on assumptions or estimates.
"In financial regulation, I have yet to find and I've been looking for several years any major financial regulation where anyone in an agency or a court or the private sector has been able to publish or put forward a credible and precise cost-benefit analysis," said John Coates, a professor at Harvard Law School. "Financial regulations are hard to study in advance, because for most of them it's very difficult to conceive or execute experiments that would let you predict what the effects of the rules would be."
Critics argue that imposing such requirements amount to more than just a few additional hurdles for regulators, while supporters contend the opposite is true.
"There's practice out there, there's textbooks on the one hand there's a body of practice that the profession has developed, but it still leaves a whole lot of wiggle room" for regulators, Calabria said.
At the same time, it's possible such concerns could give rise to a greater push to look at Dodd-Frank rules that have already been implemented, an effort some in the industry have already backed. There's little aggregate data right now that gives government officials and the banking sector a sense for what impact the law has had on the economy at-large.
"It seems sensible for lawmakers to consider the cumulative impact of Dodd-Frank regulations, and perhaps Basel III, on broader economic variables such as credit availability, economic growth, capital formation, and on job creation," said Rob Nichols, president and chief executive of the Financial Services Forum.
