- - Tuesday, July 5, 2016


Between House Speaker Paul Ryan’s regulatory reform task force report and Financial Services Committee Chairman Jeb Hensarling’s Financial Choice Act (both released in June), regulatory reform is suddenly getting the attention it deserves. Even better, Mr. Ryan’s and Mr. Hensarling’s plans address many of the long-standing concerns regulatory experts have expressed about our rulemaking process.

Regulatory process reform is a debate that began among political science and economics gurus, but it has come full circle into the policy realm with the generally accepted concepts reflected in these two new pieces of thought leadership. For example, academic economists generally accept the need for comprehensive cost-benefit analysis as regulators write rules.

Both plans make an effort to restore some of the policymaking balance between Congress and regulatory agencies. Citing research by our colleagues on the Securities and Exchange Commission’s regulatory impact analysis, Mr. Hensarling’s proposal would codify in statute “best practices” for economic analysis laid out in Executive Orders 12866 and 13563 (issued under Presidents Clinton and Obama, respectively).

Similarly, Mr. Ryan’s report highlights the lack of comprehensive cost-benefit analysis at both the Commodity Futures Trading Commission (CFTC) and the Federal Reserve when implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act, and argues for a statutory requirement for all financial regulators going forward.

This isn’t merely an academic exercise. Among the Dodd-Frank Act’s consequences is a correlative decrease in access to free checking for low-income consumers, a reduction in liquidity for corporate bonds that raises borrowing costs for business growth, and severe limits on the ability of macroeconomic stimulus to result in more lending to entrepreneurs.

Experts might disagree on the exact magnitude of the Dodd-Frank Act, but they universally agree that it does have some significant impact. These works demonstrate that the regulators should not act like ostriches with their faces in the sand: At a minimum, they should make a sincere effort to estimate those tradeoffs.

While it’s fair to argue what, exactly, such analyses should contain (the Regulatory Report Card lays out a compelling case for how to evaluate them), requiring a basic level of due diligence by regulators is a common sense and bipartisan way to ensure that regulators are carefully and faithfully executing the law as envisioned by Congress.

Just as importantly, both approaches acknowledge that there are serious tradeoffs to the kind of complex regulatory structure created by Dodd-Frank and offer an alternative that encourages diversity in the banking industry without putting taxpayers and the broader financial system at risk. Under the new proposals, banks would have a path to break free of micromanaging activity restrictions that limit their ability to diversify revenue streams.

Finally, both proposals make serious efforts at regulatory accountability, reforming agencies that have been given incredible power in the wake of Dodd-Frank. The Federal Reserve, which implemented more than 3,000 new regulatory restrictions from 2010 to 2014, is one such agency. The proposals would separate the monetary policy functions of the Fed (which should remain independent) from the regulatory and supervisory authority of the Fed (which should be accountable to Congress), and give Congress the authority to appropriate money for the latter.

They would also bring the Bureau of Consumer Financial Protection (CFPB) in line with normal standards of institutional designs for federal agencies. Echoing recommendations we’ve made in the past, the plans would replace the CFPB’s single director with a five-member, bipartisan commission, and subject the bureau to the congressional appropriations process.

There was a time when financial regulatory agencies competed with each other to encourage new financial firms to charter with them, and so self-funding helped to encourage financial regulators to internalize the impact of their rules. Post-Dodd-Frank, that dynamic has all but disappeared and its clear congressional accountability through appropriation wins the debate over self-funding.

That’s not to say, of course, that these proposals are perfect, or that they cannot be improved.

Nevertheless, it’s worth taking a moment to consider that in a policy world that often finds itself leaping from crisis to crisis, it can be a daunting challenge to draw attention to a complex issue like regulatory reform long enough for policymakers to craft thoughtful proposals. These pieces of thought leadership look to the horizon ahead, an effort that will eventually bear fruit even if they don’t immediately get signed into law.

 J.W. Verret is an associate professor at the George Mason Law School, a senior scholar with the Mercatus Center, and former chief economist and senior counsel to Rep. Jeb Hensarling. Chad Reese is the assistant director of outreach for financial policy at the Mercatus Center.

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