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Cost-Benefit Analysis of Dodd-Frank Rules Lacking, GAO Says

Joe Mont | December 19, 2012

A report issued this week by the Government Accountability Office reviewed efforts by regulatory agencies to analyze and coordinate their Dodd-Frank Act mandated rulemaking. It found that, despite good intentions, improvement is needed when assessing costs and avoiding duplicative efforts.

“Most of the regulations have not been finalized to date, but there's concerns among the industry that the impact of the rules, either individually or collectively could be too great,” says Nikki Clowers, a director in GAO's Financial Markets and Community Investment Team, which oversaw the analysis. “There's been a question about whether the benefits of the rules will outweigh the costs.”

Cost versus benefit has been a recurring theme throughout the implementation of Dodd-Frank rulemaking. Industry groups and trade associations have made what they see as inadequate reviews a cornerstone of their opposition to various rules in comment letters, lobbyist efforts, and lawsuits. Last year, the U.S. Court of Appeals for the District of Columbia Circuit quashed the SEC's proxy access rule on the grounds that such a review was lacking.

Most federal financial regulators, as independent regulatory agencies, are not subject to executive orders that require comprehensive benefit-cost analysis in accordance with guidance issued by the Office of Management and Budget (OMB).  Although most financial regulators are not required to follow OMB's guidance, they told GAO that they attempt to follow it “in principle or spirit.” GAO's review of 54 Dodd-Frank related rules, however, found that regulators did not consistently follow key elements of the OMB guidance and did not evaluate their chosen approach compared to the benefits and costs of alternatives.

GAO previously recommended that regulators more fully incorporate the OMB guidance into their rulemaking policies, and the Office of Comptroller of the Currency and the Securities and Exchange Commission have done so. By not more closely following this guidance, other financial regulators continue to miss an opportunity to improve their analyses, the report says.

The GAO analysis also looked at efforts by regulators to avoid duplicating the efforts of others.

“We found that the regulators coordinated on about a third of them,” Clowers said during a podcast held by the GAO in conjunction with the release of it study. “Most of that coordination took place at the staff level and was informal in nature. While informal coordination is good and can be appropriate for certain circumstances, we've recommended that they develop formal policies for interagency coordination to ensure that the coordination takes place, that it occurs at the right time, and that the right people are in the room.”

Because many  Dodd-Frank Act's rules are not finalized, or have not been in place very long, a detailed assessment of their market implications was difficult for the GAO's researchers to glean. As such, it developed baselines that set the stage for future analysis. For example, it crafted a series of indicators to measure changes in the characteristics of “systemically important” bank holding companies with assets of over $50 billion over time. Already, these metrics have shown that these financial institutions have decreased leverage and increased liquidity since the Dodd-Frank Act passed, in line with what the legislation intended.