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Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications


John C. Coates, IV


Harvard Law School

January 6, 2014

European Corporate Governance Institute (ECGI) - Law Working Paper No. 234/2014
Harvard Public Law Working Paper No. 14-05
Harvard Law and Economics Discussion Paper No. 757

Abstract:     
Some members of Congress, the D.C. Circuit, and legal academia are promoting a particular, abstract form of cost-benefit analysis for financial regulation: judicially enforced quantification. How would CBA work in practice, if applied to specific, important, representative rules, and what is the alternative? Detailed case studies of six rules – (1) disclosure rules under Sarbanes-Oxley Section 404, (2) the SEC’s mutual fund governance reforms, (3) Basel III’s heightened capital requirements for banks, (4) the Volcker Rule, (5) the SEC’s cross-border swap proposals and (6) the FSA’s mortgage reforms – finds that precise, reliable, quantified CBA remains unfeasible. Quantified CBA of such rules can be no more than “guesstimated,” as it entails (a) causal inferences that are unreliable under standard regulatory conditions; (b) using problematic data, and/or (c) the same contestable, assumption-sensitive macroeconomic and/or political modeling used to make monetary policy, which even CBA advocates would exempt from CBA law. Expert judgment remains an inevitable part even of what advocates label “gold-standard” quantified CBA, because finance is central to the economy, is social and political, and is non-stationary. Judicial review of quantified CBA can be expected to do more to camouflage discretionary choices than to discipline agencies or promote democracy.

Number of Pages in PDF File: 102

Keywords: Cost-benefit analysis, financial regulation, nonquantifiable benefits, Securities and Exchange Commission, Commodities and Futures Trading Commission, discounting, Basel III, Sarbanes-Oxley Act, securities regulation, consumer finance, mutual funds, Volcker Rule

JEL Classification: D02, D61, D73, D78, G18, G38, I3, K22, K23, L51

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Date posted: January 8, 2014 ; Last revised: May 29, 2014

Suggested Citation

Coates, IV, John C., Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications (January 6, 2014). European Corporate Governance Institute (ECGI) - Law Working Paper No. 234/2014; Harvard Public Law Working Paper No. 14-05; Harvard Law and Economics Discussion Paper No. 757. Available at SSRN: http://ssrn.com/abstract=2375396 or http://dx.doi.org/10.2139/ssrn.2375396

Contact Information

John C. Coates (Contact Author)
Harvard Law School ( email )
1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States
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