The Institutional Framework for Cost-Benefit Analysis in Financial Regulation: A Tale of Four Paradigms?

This paper analyzes the institutional framework that has historically governed the cost-benefit analysis (CBA) of financial regulation. Although U.S. financial regulators are often portrayed as being immune from CBA, the paper shows how each major regulator has historically used CBA under one of four distinct institutional paradigms. The existence of these distinct paradigms highlights that a formal CBA requirement need not lead to regulatory paralysis, but the uneven application of CBA they engender provides reason to believe that this institutional framework is far from ideal. To the extent that the goal of CBA is to provide meaningful, transparent analysis of rule making while avoiding regulatory paralysis, the paper argues in favor of moving toward a more uniform institutional framework for financial regulation. In particular, adopting a single CBA paradigm that requires interagency coordination but avoids judicial review provides the greatest promise for achieving this goal in financial regulation.