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January 29, 2020

Opposing Industry-Cost-Only Analysis as a Trojan Horse to Kill Critical Rules

Comment Letters | Opposing Industry-Only Cost Analysis as a Trojan Horse To Understate the Public Interest and Overstate Industry Costs to Kill Financial Protection Rules

Cost-benefit analysis (CBA) sounds good and neutral.  After all, who could oppose only doing something when the benefits outweigh the costs?  The fatal flaws in a cost-benefit framework only appear when the assumptions underlying the analysis are identified:  that all the costs and benefits are known, quantifiable and weighted neutrally by an objective decision maker after considering all the facts and circumstances.

That, of course, bears no relationship to reality in a rulemaking process that is dominated by the money, power, influence and informational asymmetry of the financial industry.  That is also why Wall Street’s biggest banks and the financial industry more broadly have tried to require a rigorous, quantitative CBA in as many rules, laws and regulations as possible.  Better Markets has been a counterweight to this argument since its founding in 2010 at the regulatory agencies, in the courts and throughout the public policy debates about financial protection rules.

Simply put, industry’s costs (often significantly inflated and speculative) are easy to quantify whereas the public interest costs or benefits are often very difficult to quantify, which is why we refer to CBA as “industry-cost-only analysis.”  These problems are compounded by the fact that the industry usually exclusively has the critical data which they claim supports their position.  However, they almost always refuse to disclose the information, claiming it is proprietary and confidential.  (And, when regulators try to obtain that data for the purposes of informed public policy like the SEC’s maker-taker test pilot program, the industry resists, fights and, ultimately, sues, as it did with maker-taker, which we supported here and here.)

The FDIC is just the latest agency to take up the industry’s unending quest to inject CBA into rulemaking.  As we detailed in our comment letter, integrating CBA would undermine the safety and soundness of banks, endanger the deposit insurance fund (or “DIF”), and increase financial instability.  It also directly conflicts with Congress’ decision not to impose such a requirement on the FDIC.  (For those interested in learning more about this, footnote 5 in the comment letter cites our prior work in this area, including a seminal report entitled “Setting the Record Straight on CBA and Financial Reform at the SEC.”)

Better Markets recently filed two additional comment letters with the OCC and SEC, and one rebuttal letter with the SEC.  The first comment letter (sent to the OCC)opposed the agency’s attempt to effectively allow financial predators to evade state caps on interest amounts (so-called “usury” laws).  The OCC proposal would pave the way for unscrupulous loan sharks, payday lenders and other predatory enterprises to gouge vulnerable borrowers with enormous interest rates with impunity and in direct violation of state consumer protection laws.  We are aggressively opposing this proposal.  The second comment letter, filed with the SEC, opposes the opening of three new loopholes that would allow broker-dealers in the over-the-counter market to continue exploiting an exception that deprives investors of current, accurate information on the financial condition of companies.  Finally, we filed a letter with the Chairman of the SEC supporting the speedy implementation of the Consolidated Audit Trail (CAT), which is a revolutionary tool that has the potential to dramatically increase the ability to protect investors and markets.  The letter is just the latest in our years-long effort to get this game-changing technology online and working for all Americans.



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