Updated January 3, 2017
Introduction to Financial Services: “Regulatory Relief”
Congress is considering whether to provide “regulatory
order to adhere to the regulation, such as employee training.
relief” in the area of financial services. This In Focus gives
Some regulations create one-time operating costs borne
a broad overview of the policy tradeoffs inherent in relief
upfront while others are recurring costs that exist so long as
and the forms that relief proposals could take. It does not
the requirement is in effect. Opportunity costs are the costs
cover specific proposals, but instead provides a framework
associated with foregone business opportunities because of
for evaluating any proposal, whether it is targeted at
additional regulation. A lender may, for example, make
banking, securities, derivatives, or insurance. CRS takes no
fewer mortgages because new regulations make mortgage
position on specific regulatory relief proposals or the
lending more expensive and instead perform a different
relative balance between costs and benefits achieved in the
type of lending that is now more profitable.
current regulatory structure.
Policy Tradeoffs
My central theme has been that good regulatory and
In determining whether to provide regulatory relief, a
supervisory policies should implement congressional
central question is whether an appropriate tradeoff has been
intent in ways that maximize social benefits and
struck between the benefits and costs of regulation.
minimize social costs. – Federal Reserve Chairman
Ben Bernanke, 2006
Benefits. Financial regulation has different objectives and
potential benefits, including enhancing the safety and
soundness of certain institutions; protecting consumers and
Tradeoffs. Regulatory relief may face tradeoffs between
investors from fraud, manipulation, and discrimination; and
reducing regulatory burden and potentially reducing the
promoting financial stability while reducing systemic risk.
benefits of regulation. The tradeoffs are not limited only to
A financial regulatory system that delivers a baseline level
the effects on the direct recipients of relief—usually the
of stability and trust between financial agents is a
providers of financial services—but also to the effects on
precondition to a healthy financial system that can generate
consumers, investors, particular markets, and market
robust economic growth.
stability more broadly.
Regulators employ different tools to achieve these goals.
The presence of regulatory burden does not necessarily
Regulators issue rules; supervise and examine institutions
mean that a regulation is undesirable or should be repealed.
to verify that the rules are followed; and take enforcement
A regulation can have benefits that could outweigh its costs,
actions, such as imposing fines, when the regulations are
but the presence of costs means, tautologically, that
not followed. In other cases, regulators require companies
regulation causes regulatory burden. The concept of
or individuals to meet certain standards and receive a
regulatory burden can be contrasted with the phrase unduly
license before engaging in a particular business practice.
burdensome. Whereas regulatory burden is about the costs
The specific goals regulators attempt to achieve and the
associated with a regulation, unduly burdensome refers to
tools they use vary by market. For example, risk
the balance between benefits and costs. For example, some
management is emphasized for banking regulation and
would consider a regulation to be unduly burdensome if
disclosure is a priority in securities regulation.
costs are in excess of benefits or the same benefits could be
achieved at a lower cost. But the presence of regulatory
Costs. The costs associated with government regulation—
burden does not mean that all regulations are unduly
rulemaking, supervision, and enforcement—are referred to
burdensome.
as regulatory burden. Regulatory requirements are often
imposed on providers of financial services, so financial
Policymakers consider these tradeoffs and evaluate the
institutions are often the focus of discussions about
broader effects of regulation that could be either positive or
regulatory burden. But costs associated with regulation can
negative, such as how a requirement would impact
flow through the providers and ultimately be borne, in part,
innovation, the price of credit, and the availability of credit.
by different entities, including financial institutions,
For example, efforts to protect consumers against potential
consumers, the government, and the economy at large. For
actions taken by banks may drive up the cost for a bank to
example, a provider may respond to increased regulatory
provide certain services and result in that activity migrating
burden by raising the prices it charges to customers. If
to a less regulated part of the financial system or to foreign
regulatory burden reduces the long-term availability of
jurisdictions with lower regulatory standards. However,
credit, it would have a negative effect on business
tradeoffs are not always present. If regulation makes an
investment and economic growth.
unstable system more stable, it could reduce cost and
increase the availability of credit.
Regulatory burden may manifest itself in different forms.
Operating costs are the costs the company must bear in
https://crsreports.congress.gov
Introduction to Financial Services: “Regulatory Relief”
Statutory Requirements to Consider
statute and leaves it to regulators to fill in the details.
Regulatory Burden
However, some recent legislative proposals would make
Congress has required regulators to consider ways to
changes to specific details of the regulation that regulators
minimize regulatory burden within the rulemaking process.
have issued. Thus, some may oppose such proposals on the
For example, the Paperwork Reduction Act (44 U.S.C.
grounds that Congress is overriding regulator discretion and
§§3501-3521) requires regulators to report the hours that
lacks the expertise to properly make detailed, technical
institutions will spend complying with their requests for
regulatory judgments. Congress might nevertheless
information. This “paperwork burden,” is just one
determine that narrow intervention is justified because
component of regulatory burden, however.
regulators have misinterpreted its will or are not properly
weighing other relevant policy objectives. Congress can
Pursuant to the Regulatory Flexibility Act (5 U.S.C. §§601-
pursue regulatory relief through regular order or by using a
612), financial regulators are required to include in
special legislative tool, the Congressional Review Act, to
rulemakings an assessment of the rule’s impact on “small
invalidate recently enacted rules.
entities,” which includes—but is not limited to—small
financial institutions. Agencies are required to make an
In other instances, regulators already have authority to
assessment about possible alternatives and projected costs
adjust regulations on their own without additional authority
of the rule, however, only if they believe that the rule will
from Congress. Generally speaking, changes via
have a “significant economic impact on a substantial
rulemaking would originate from the agency that originally
number of small entities.”
promulgated the rule; in the case of financial regulations,
these agencies are independent from the Administration.
Each financial regulator has different statutory requirements
Regulators could make changes individually, regulation-by-
for performing cost-benefit analyses, but broadly speaking,
regulation, or they could reassess regulations in a more
they have a varied set of requirements for considering costs
comprehensive manner. For example, under the Economic
and benefits of their regulations and are not subject to the
Growth and Regulatory Paperwork Reduction Act
same requirements as executive agencies. Because
(EGRPRA; 12 U.S.C. §3311), the banking regulators
quantitative analyses are not required for all rules, it is not
review regulations every 10 years to identify regulations
possible to sum up the expected costs of all regulations and
that are “outdated, unnecessary, or unduly burdensome” (a
quantify the overall magnitude of regulatory burden.
review is currently being conducted). Finally, affected
parties sometimes sue agencies to overturn regulations, and
Cost-benefit analyses can be quite difficult to perform for
Congress is debating whether to make it easier for
financial regulations. The costs may be more concentrated
regulations to be overturned in court.
or tangible and therefore easier to quantify, whereas the
benefits may be more diffused and not materialize for an
In addition, policymakers must determine to whom—if
extended period of time. For example, how does one
anyone—relief should be provided. Relief could be
quantify that a regulation decreases the likelihood of a
provided to either all firms to which a regulation applies or
financial crisis? Despite the challenges of quantifying
only a subset of firms based on firm size, firm type, or the
financial rules, some believe a more rigorous analysis
activities a firm performs.
would help minimize regulatory burden and encourage
more cost-effective regulations.
Policymakers would also need to consider how relief should
be provided, for example, by repealing entire provisions,
Forms of Regulatory Relief
providing exemptions from specific requirements, or
Some regulatory relief proposals can be characterized as
tailoring a requirement so that it still applies to certain
forward-looking—focusing on how to reduce the burden
entities but in a less burdensome way. Examples of
associated with future rulemakings, such as strengthening
different forms of tailoring are streamlining the regulation,
existing cost-benefit analysis requirements on financial
grandfathering existing firms or types of instruments from
regulators to bring them in to line with executive agency
the regulation, or phasing in a new regulation over time.
standards. Alternatively, regulatory relief can be backward-
looking—modifying existing regulations.
CRS Resources
CRS Report R43999, An Analysis of the Regulatory Burden
As relief proposals are debated, a useful framework to
on Small Banks, by Sean M. Hoskins and Marc Labonte.
categorize proposals includes assessing through what
channel relief would be provided, to whom relief would be
CRS Report R41974, Cost-Benefit and Other Analysis
provided, and how relief would be provided.
Requirements in the Rulemaking Process, coordinated by
Maeve P. Carey.
Regulations can stem from statutory requirements,
regulatory or judicial interpretation of statute, or regulators’
CRS In Focus IF10023, The Congressional Review Act
broad discretionary powers. If policymakers choose to
(CRA), by Alissa M. Dolan, Maeve P. Carey, and
provide regulatory relief, they could do so through several
Christopher M. Davis.
different channels.
Marc Labonte,
Legislation could be enacted that would affect a regulation
in a specific way. Typically, in the area of financial
IF10162
regulation, Congress sets the broad goals of regulation in
https://crsreports.congress.gov
Introduction to Financial Services: “Regulatory Relief”
Disclaimer
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https://crsreports.congress.gov | IF10162 · VERSION 5 · UPDATED