March 24, 2015
Introduction to Financial Services: “Regulatory Relief”
The 114th Congress is considering legislation to provide
“regulatory relief” in the area of financial services. This In
Focus gives a broad overview of the policy tradeoffs
inherent in relief and the forms that relief proposals could
take. It does not cover specific proposals, but instead
provides a framework for evaluating any proposal, whether
it is targeted at banking, securities, derivatives, or
insurance. CRS takes no position on specific regulatory
relief proposals or the relative balance between costs and
benefits achieved in the current regulatory structure.
In determining whether to provide regulatory relief, a
central question is whether an appropriate tradeoff has been
struck between the benefits and costs of regulation. In other
words, can relief be provided while still maintaining the
stability of the financial system and ensuring consumers are
protected, or would relief undermine those goals?
Regulatory relief is generally focused on the providers of
financial services—such as banks, broker-dealers, and other
institutions—but what effect would relief have on
consumers, investors, particular markets, and market
stability more broadly? Understanding the benefits and
costs of regulation is a precondition for deciding whether
the appropriate balance has been achieved.
Benefits. Financial regulation has different objectives and
potential benefits, including enhancing the safety and
soundness of certain institutions; protecting consumers and
investors from fraud, manipulation, and discrimination; and
promoting financial stability while reducing systemic risk.
Regulators employ different tools to achieve these goals.
Regulators issue rules; supervise and examine institutions
to verify that the rules are followed; and take certain
enforcement actions, such as imposing fines, when the
regulations are not followed. In other cases, regulators
require companies or individuals to meet certain standards
and receive a license before engaging in a particular
The specific goals regulators attempt to achieve and the
tools they used vary by market. For example, risk
management is emphasized for banking regulation and
disclosure is a priority in securities regulation.
Costs. The costs associated with government regulation—
rulemaking, supervision, and enforcement—are referred to
as regulatory burden. The presence of regulatory burden
does not necessarily mean that a regulation is undesirable or
should be repealed. A regulation can have benefits that
could outweigh its costs, but the presence of costs means,
tautologically, that there is regulatory burden.
The concept of regulatory burden can be contrasted with the
phrase unduly burdensome. Whereas regulatory burden is
about the costs associated with a regulation, unduly
burdensome refers to the balance between benefits and
costs. For example, some would consider a regulation to be
unduly burdensome if costs are in excess of benefits or the
same benefits could be achieved at a lower cost. But the
mere presence of regulatory burden does not mean that a
regulation is unduly burdensome.
Regulatory requirements are often imposed on providers of
financial services, so financial institutions are often the
focus of discussions about regulatory burden. But costs
associated with regulation can flow through the providers
and be ultimately borne, in part, by different entities,
including financial institutions, consumers, the government,
and the economy at large. For example, a provider may
respond to increased regulatory burden by raising the prices
it charges to customers.
Regulatory burden may manifest itself in different forms.
Operating costs are the costs the company must bear in
order to adhere to the regulation, such as employee training.
Some operating costs are one-time costs borne upfront
while others are recurring costs that exist so long as the
requirement is in effect. Opportunity costs are the costs
associated with foregone business opportunities because of
additional regulation. A lender may, for example, make
fewer mortgages because new regulations make mortgage
lending more expensive and instead perform a different
type of lending that is now more profitable.
My central theme has been that good regulatory and
supervisory policies should implement congressional
intent in ways that maximize social benefits and
minimize social costs. – Federal Reserve Chairman
Ben Bernanke, 2006
Tradeoffs. Regulatory relief may face tradeoffs between
reducing regulatory burden and potentially reducing the
benefits of regulation (e.g., safety and soundness, consumer
and investor protection, and financial stability).
Policymakers consider these tradeoffs and evaluate the
broader effect that regulation will have in certain areas that
could be either positive or negative, such as how a
requirement would impact innovation, the price of credit,
and the availability of credit. For example, efforts to protect
consumers against actions taken by banks may drive up the
cost for a bank to provide certain services, such as small-
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Introduction to Financial Services: “Regulatory Relief”
dollar loans for $100 or $200, and result in that activity
migrating to a less regulated part of the financial system,
such as payday lenders, or to foreign jurisdictions with
lower regulatory standards.
be made to regulations stemming from statutory
requirements, regulatory or judicial interpretation of statute,
or those originating from regulators’ broad discretionary
However, tradeoffs are not always present. If regulation
makes an unstable system more stable, it could reduce cost
and increase the availability of credit.
As relief proposals are debated, a useful framework to
categorize proposals includes assessing through what
channel relief would be provided, to whom relief would be
provided, and how relief would be provided.
Statutory Requirements to Consider
As part of the rulemaking process, Congress has required
regulators to consider ways to minimize regulatory burden.
For example, the Paperwork Reduction Act (44 U.S.C.
§§3501-3521) requires regulators to report the hours that
institutions will spend complying with their requests for
information. This “paperwork burden,” is just one
component of regulatory burden, however.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. §§601612), financial regulators are required to include in
rulemakings an assessment of the rule’s impact on “small
entities,” which includes—but is not limited to—small
financial institutions. Agencies are only required to make
an assessment about possible alternatives and projected
costs of the rule, however, if they believe that the rule will
have a “significant economic impact on a substantial
number of small entities.”
Each financial regulator has different statutory requirements
for performing cost-benefit analyses, but broadly speaking,
they have a varied set of requirements for considering costs
and benefits of their regulations and are not subject to the
same requirements as executive agencies. Because
quantitative analyses are not required for all rules, it is not
possible to sum up the expected costs of all regulations and
quantify the overall magnitude of regulatory burden.
Cost-benefit analyses can be quite difficult to perform for
financial regulations. The costs may be more concentrated
or tangible and therefore easier to quantify, whereas the
benefits may be more diffused and not materialize for an
extended period of time. For example, how does one
quantify that a regulation decreases the likelihood of a
financial crisis? Despite the challenges of quantifying
financial rules, some believe a more rigorous analysis
would help minimize regulatory burden and encourage
more cost-effective regulations.
If policymakers choose to provide regulatory relief, they
could do so through several different channels. Legislation
could be enacted that would affect a regulation in a specific
way. In other instances, regulators already have authority to
adjust regulations on their own without additional authority
from Congress. Regulators could make changes
individually, regulation-by-regulation, or they could
reassess regulations in a more comprehensive manner. For
example, under the Economic Growth and Regulatory
Paperwork Reduction Act (EGRPRA; 12 U.S.C. §3311),
the banking regulators review regulations every 10 years to
identify regulations that are “outdated, unnecessary, or
unduly burdensome” (a review is currently being
conducted). Some regulations have also been successfully
challenged in court, although this form of relief may only
be temporary because regulations might then be reissued in
a modified form.
In addition, policymakers must determine to whom—if
anyone—relief should be provided. Relief could be
provided to either all firms to which a regulation applies or
only a subset of firms based on firm size, firm type, or the
activities a firm performs.
Policymakers would also need to consider how relief should
be provided, for example, by repealing entire provisions,
providing exemptions from specific requirements, or
tailoring a requirement so that it still applies to certain
entities but in a less burdensome way. Examples of
different forms of tailoring are streamlining the regulation,
grandfathering existing firms or types of instruments from
the regulation, or phasing in a new regulation over time.
CRS Report R43087, Who Regulates Whom and How? An
Overview of U.S. Financial Regulatory Policy for Banking
and Securities Markets, by Edward V. Murphy.
CRS Report R41974, Cost-Benefit and Other Analysis
Requirements in the Rulemaking Process, coordinated by
Maeve P. Carey.
Forms of Regulatory Relief
Some regulatory relief policies can be characterized as
forward-looking—focusing on how to reduce the burden
associated with future rulemakings, such as strengthening
existing cost-benefit analysis requirements on financial
regulators to bring them in to line with executive agency
standards. Alternatively, regulatory relief can be backwardlooking—modifying existing regulations. Modifications can
Sean M. Hoskins, firstname.lastname@example.org, 7-8958
Marc Labonte, email@example.com, 7-0640
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