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March 23, 2023

The Ongoing Use and Abuse of Cost-Benefit Analysis in Financial Regulation

Better Markets released a report entitled “The Ongoing Use and Abuse of Cost-Benefit Analysis  in Financial Regulation”:

Why It Matters. Preserving the ability of regulators to adopt the rules we need to protect investors and prevent market crashes is essential, and that means shining a light on the use of cost-benefit analysis as a weapon to undermine those rules. Protecting consumers, investors, and financial stability through regulation inevitably entails some costs, which the financial industry must bear.  But we learned from the financial crash of 2008 that the alternative is far worse:  Non-regulation and de-regulation are failed approaches that ultimately impose enormous costs on all Americans, which dwarf regulatory compliance costs.  Nevertheless, the financial industry constantly fights to delay, weaken, and fend off new rules, even as its reckless and illegal conduct continues.  And one of its favorite weapons is cost-benefit analysis—the notion that every agency rule must be backed up by an exhaustive and quantitative cost-benefit analysis.

What We Said. In our report, we expose the misconceptions surrounding cost-benefit analysis in financial regulation.  While cost-benefit analysis may have an intuitive appeal, it is fraught with drawbacks. It is inaccurate and biased, placing too much weight on industry’s easily quantified costs and too little on the enormous but often harder to calculate benefits that regulation provides.  It is rarely the type of economic analysis that Congress actually instructed an agency to conduct.  And it drains away scarce agency resources, as teams of government economists struggle to precisely forecast and calculate the costs and benefits of rules, always with the threat of a court challenge looming ahead.

Our report updates trends in the use of cost-benefit analysis as a weapon, primarily in the courts but also through bills and executive orders.  In addition, we highlight special concerns surrounding the use of cost-benefit analysis at the SEC and the Consumer Financial Protection Bureau.  We close by offering some general principles that should guide the use of cost-benefit analysis at all federal regulatory agencies, and in our appendix, we briefly canvass the academic literature on the subject.

Bottom Line. The drawbacks of quantitative cost-benefit analysis as applied to financial regulation outweigh any benefits it may offer—it fails its own test.


The Report is available here.



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