March 24, 2015
Introduction to Financial Services: “Regulatory Relief”
could outweigh its costs, but the presence of costs means,
The 114th Congress is considering legislation to provide
tautologically, that there is regulatory burden.
“regulatory relief” in the area of financial services. This In
Focus gives a broad overview of the policy tradeoffs
The concept of regulatory burden can be contrasted with the
inherent in relief and the forms that relief proposals could
phrase unduly burdensome. Whereas regulatory burden is
take. It does not cover specific proposals, but instead
about the costs associated with a regulation, unduly
provides a framework for evaluating any proposal, whether
burdensome refers to the balance between benefits and
it is targeted at banking, securities, derivatives, or
costs. For example, some would consider a regulation to be
insurance. CRS takes no position on specific regulatory
unduly burdensome if costs are in excess of benefits or the
relief proposals or the relative balance between costs and
same benefits could be achieved at a lower cost. But the
benefits achieved in the current regulatory structure.
mere presence of regulatory burden does not mean that a
regulation is unduly burdensome.
Policy Tradeoffs
Regulatory requirements are often imposed on providers of
In determining whether to provide regulatory relief, a
financial services, so financial institutions are often the
central question is whether an appropriate tradeoff has been
focus of discussions about regulatory burden. But costs
struck between the benefits and costs of regulation. In other
associated with regulation can flow through the providers
words, can relief be provided while still maintaining the
and be ultimately borne, in part, by different entities,
stability of the financial system and ensuring consumers are
including financial institutions, consumers, the government,
protected, or would relief undermine those goals?
and the economy at large. For example, a provider may
Regulatory relief is generally focused on the providers of
respond to increased regulatory burden by raising the prices
financial services—such as banks, broker-dealers, and other
it charges to customers.
institutions—but what effect would relief have on
consumers, investors, particular markets, and market
Regulatory burden may manifest itself in different forms.
stability more broadly? Understanding the benefits and
Operating costs are the costs the company must bear in
costs of regulation is a precondition for deciding whether
order to adhere to the regulation, such as employee training.
the appropriate balance has been achieved.
Some operating costs are one-time costs borne upfront
while others are recurring costs that exist so long as the
Benefits. Financial regulation has different objectives and
requirement is in effect. Opportunity costs are the costs
potential benefits, including enhancing the safety and
associated with foregone business opportunities because of
soundness of certain institutions; protecting consumers and
additional regulation. A lender may, for example, make
investors from fraud, manipulation, and discrimination; and
fewer mortgages because new regulations make mortgage
promoting financial stability while reducing systemic risk.
lending more expensive and instead perform a different
type of lending that is now more profitable.
Regulators employ different tools to achieve these goals.
Regulators issue rules; supervise and examine institutions
My central theme has been that good regulatory and
to verify that the rules are followed; and take certain
supervisory policies should implement congressional
enforcement actions, such as imposing fines, when the
intent in ways that maximize social benefits and
regulations are not followed. In other cases, regulators
minimize social costs. – Federal Reserve Chairman
require companies or individuals to meet certain standards
Ben Bernanke, 2006
and receive a license before engaging in a particular
business practice.
Tradeoffs. Regulatory relief may face tradeoffs between
The specific goals regulators attempt to achieve and the
reducing regulatory burden and potentially reducing the
tools they used vary by market. For example, risk
benefits of regulation (e.g., safety and soundness, consumer
management is emphasized for banking regulation and
and investor protection, and financial stability).
disclosure is a priority in securities regulation.
Policymakers consider these tradeoffs and evaluate the
broader effect that regulation will have in certain areas that
Costs. The costs associated with government regulation—
could be either positive or negative, such as how a
rulemaking, supervision, and enforcement—are referred to
requirement would impact innovation, the price of credit,
as regulatory burden. The presence of regulatory burden
and the availability of credit. For example, efforts to protect
does not necessarily mean that a regulation is undesirable or
consumers against actions taken by banks may drive up the
should be repealed. A regulation can have benefits that
cost for a bank to provide certain services, such as small-
www.crs.gov | 7-5700

---

Introduction to Financial Services: “Regulatory Relief”
dollar loans for $100 or $200, and result in that activity
be made to regulations stemming from statutory
migrating to a less regulated part of the financial system,
requirements, regulatory or judicial interpretation of statute,
such as payday lenders, or to foreign jurisdictions with
or those originating from regulators’ broad discretionary
lower regulatory standards.
powers.
However, tradeoffs are not always present. If regulation
As relief proposals are debated, a useful framework to
makes an unstable system more stable, it could reduce cost
categorize proposals includes assessing through what
and increase the availability of credit.
channel relief would be provided, to whom relief would be
provided, and how relief would be provided.
Statutory Requirements to Consider
Regulatory Burden
If policymakers choose to provide regulatory relief, they
could do so through several different channels. Legislation
As part of the rulemaking process, Congress has required
could be enacted that would affect a regulation in a specific
regulators to consider ways to minimize regulatory burden.
way. In other instances, regulators already have authority to
For example, the Paperwork Reduction Act (44 U.S.C.
adjust regulations on their own without additional authority
§§3501-3521) requires regulators to report the hours that
from Congress. Regulators could make changes
institutions will spend complying with their requests for
individually, regulation-by-regulation, or they could
information. This “paperwork burden,” is just one
reassess regulations in a more comprehensive manner. For
component of regulatory burden, however.
example, under the Economic Growth and Regulatory
Paperwork Reduction Act (EGRPRA; 12 U.S.C. §3311),
Pursuant to the Regulatory Flexibility Act (5 U.S.C. §§601-
the banking regulators review regulations every 10 years to
612), financial regulators are required to include in
identify regulations that are “outdated, unnecessary, or
rulemakings an assessment of the rule’s impact on “small
unduly burdensome” (a review is currently being
entities,” which includes—but is not limited to—small
conducted). Some regulations have also been successfully
financial institutions. Agencies are only required to make
challenged in court, although this form of relief may only
an assessment about possible alternatives and projected
be temporary because regulations might then be reissued in
costs of the rule, however, if they believe that the rule will
a modified form.
have a “significant economic impact on a substantial
number of small entities.”
In addition, policymakers must determine to whom—if
anyone—relief should be provided. Relief could be
Each financial regulator has different statutory requirements
provided to either all firms to which a regulation applies or
for performing cost-benefit analyses, but broadly speaking,
only a subset of firms based on firm size, firm type, or the
they have a varied set of requirements for considering costs
activities a firm performs.
and benefits of their regulations and are not subject to the
same requirements as executive agencies. Because
Policymakers would also need to consider how relief should
quantitative analyses are not required for all rules, it is not
be provided, for example, by repealing entire provisions,
possible to sum up the expected costs of all regulations and
providing exemptions from specific requirements, or
quantify the overall magnitude of regulatory burden.
tailoring a requirement so that it still applies to certain
entities but in a less burdensome way. Examples of
Cost-benefit analyses can be quite difficult to perform for
different forms of tailoring are streamlining the regulation,
financial regulations. The costs may be more concentrated
grandfathering existing firms or types of instruments from
or tangible and therefore easier to quantify, whereas the
the regulation, or phasing in a new regulation over time.
benefits may be more diffused and not materialize for an
extended period of time. For example, how does one
CRS Resources
quantify that a regulation decreases the likelihood of a
financial crisis? Despite the challenges of quantifying
CRS Report R43087, Who Regulates Whom and How? An
financial rules, some believe a more rigorous analysis
Overview of U.S. Financial Regulatory Policy for Banking
would help minimize regulatory burden and encourage
and Securities Markets, by Edward V. Murphy.
more cost-effective regulations.
CRS Report R41974, Cost-Benefit and Other Analysis
Forms of Regulatory Relief
Requirements in the Rulemaking Process, coordinated by
Maeve P. Carey.
Some regulatory relief policies can be characterized as
forward-looking—focusing on how to reduce the burden
Sean M. Hoskins, shoskins@crs.loc.gov, 7-8958
associated with future rulemakings, such as strengthening
Marc Labonte, mlabonte@crs.loc.gov, 7-0640
existing cost-benefit analysis requirements on financial

regulators to bring them in to line with executive agency
standards. Alternatively, regulatory relief can be backward-
IF10162
looking—modifying existing regulations. Modifications can
www.crs.gov | 7-5700

---