Analyze This

The SEC's experience shows that financial regulators are capable of doing economic analysis to help inform their decisions. A little external pressure – in the form of congressional directives and court oversight – just might provide the needed incentive for other financial regulators to follow the SEC's lead.

The Trump administration and key members of Congress want to repeal or substantially revise the Dodd-Frank Act – the most regulatory piece of legislation enacted during the Obama administration. One of the contemplated changes would require financial regulators to assess the need for new rules and evaluate benefits and costs before they regulate.

Some experts question whether financial regulatory agencies are capable of conducting useful economic analysis of financial regulation. My answer is yes. And their capabilities become evident when Congress and the courts tell them they have to conduct such analysis.

Most of the objections to economic analysis of financial regulations focus on benefit and cost calculations. Some experts object that prospective assessment of benefits and costs is inherently inaccurate because the prices used in the calculations will change in unpredictable ways as people in the financial industry react to the regulation. Others claim that financial regulators do not currently possess the knowledge and ability to quantify all benefits and costs accurately, so they should not be required to try.

Continue reading