Crapo, Shelby Concerned by IG Reports on Dodd-Frank Implementation

On May 4, 2011, the ten Republican Members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs sent a letter to the Inspectors General of the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (Fed), the Office of the Comptroller of the Currency (OCC, Treasury), and the Securities and Exchange Commission (SEC) asking each of them to conduct a review of the economic analysis performed by the regulatory agency under their supervision.  This week, the Inspectors General reported the results of their reviews.  Idaho Senator Mike Crapo, ranking Republican on the Subcommittee on Securities, Insurance, and Investment made the following remarks:

"The IG reports highlight the fact that there are no uniform cost-benefit requirements for our financial regulators that focus on economic growth, job creation, or competitiveness.  The regulators need to conduct rigorous analyses of the costs and benefits of their rules and the effects those rules could have on the economy."

Senator Richard Shelby (R-Alabama), ranking Republican on the Banking Committee, issued the following statement: 

"The Inspectors General reports deepened my concern that the regulatory agencies charged with implementing Dodd-Frank are not undertaking the type of economic analysis that is necessary to reveal how Dodd-Frank will affect our economy.  In the coming days, Republican Banking Committee staff will conduct in-depth briefings with each of the Inspectors General to discuss the methodologies and findings contained in their reports, as well as next-steps. We must continue to monitor and improve the amount and type of analysis that the financial regulators are conducting in implementing this far-reaching law."

Based upon the results of his initial assessment, the SEC's Inspector General has stated that he will be conducting a more in-depth review of the cost-benefit analyses performed by the agency under his supervision.  An examination of all of the IG reports raised a number of specific, preliminary concerns, including:

• Only the SEC and CFTC are subject to specific statutory requirements to conduct economic analysis.  The OCC  was previously obligated to conduct economic analysis, but Dodd-Frank eliminated these obligations.
• SEC attorneys, rather than economists, conduct the bulk of the agency's economic analysis.
• The CFTC's approach to cost-benefit analysis has been "very bare-bones" and "minimalist." New guidance for CFTC staff on the topic seems intended to convey the impression that meaningful consideration was given to costs and benefits.
• Agencies have shied away from assessing the cost of Dodd-Frank mandates, even though such information would be informative to Congress and the public.
• To the extent economic analysis is done, it is focused on compliance costs rather than also looking at the effects that rules will have on economic growth and job creation.
• Only the FDIC seems committed to looking at the cumulative impacts of Dodd-Frank rules.
• The delay in finalizing foundational rulemakings, such as defining "swaps" and "swap dealers," has made it difficult to assess the costs of other rules.  The agencies are not sequencing their rulemakings in an order that would allow for earlier rules to provide quantitative data that would inform later rules.
• Agencies often poorly document the economic analysis they undertake, which leads to a lack of consistency, even within agencies, on how and how much economic analysis is conducted.
• There is no formal process in place that provides for coordination on economic analyses among the Federal banking agencies.  Even when multiple agencies work on a joint rule, their collaboration on economic analysis appears to be poor.
• Much of the analysis that is conducted appears designed to check-the-box, rather than provide real insight into the costs and benefits of proposed regulatory approaches and possible alternatives.
• Agencies often use vague language to describe the analysis that they have undertaken, which makes it difficult for commenters to understand and challenge the agencies' methodologies, assumptions, and conclusions.