Larry D. Wall, Executive Director of the Center for Financial Innovation and Stability at the Federal Reserve Bank of Atlanta, has released a commentary examining why major pieces of financial regulatory legislation are relatively rare events and also discussed the implications for analysts trying to contribute to future financial regulatory policy.
Difficulties in passage. In his commentary, entitled “Large, Complex Financial Regulation,” Wall noted there a number of reasons passing financial regulatory legislation is difficult. The legislative process provides those dedicated to stopping a bill “numerous avenues for blocking its adopting into law.” Also, beneficiaries of the status quo have an incentive to use their political influence to block new legislation that might erase their benefits. Wall added, “Furthermore, most voters are likely to be uninterested in financial regulatory topics, viewing them as arcane and remote from their day-to-day lives. As a result, new financial legislation, especially major legislation that increases costs for existing firms or decreases safety net benefits, is difficult to pass.”
Prompt passage. Although Wall cited reasons for difficulty in passing financial regulatory legislation, he pointed out that “nevertheless new restrictive legislation is sometimes passed.” This type of legislation tends to be a response to a scandal or crisis. The author cited the Sarbanes-Oxley Act of 2002 that was passed in response to the Enron and WorldCom accounting scandals and the Dodd-Frank Act in response to the 2007-2009 financial crisis.
Wall noted that time immediately after a scandal creates a condition favorable to the passage of new legislation since it creates pressure to act promptly and a failure to do so would see the public's interest in the topic will likely fade as time passes, and those opposed are likely to regain some of their political strength.
Delegation of rule-making. The difficulty of passing new regulatory legislation also has important implications for the delegation of rule-making power to the regulatory agencies. Wall observed, “Given the likely difficulty of passing such revisions through the legislative process, Congress may often find it more effective to give the regulators broad grants of authority that allow the regulatory agencies to make needed revisions without seeking legislative approval.”
Policy analysis. Finally, Wall’s commentary concluded that it would be advantageous to develop policy recommendations in advance of the next crisis so that analysts can focus on the implications of different policies rather than just the immediate impact of a policy on one type of risk and/or on one type of intermediary.
To achieve this, Wall suggested four important considerations:
- Policy recommendations should focus on identifying and maintaining the flow of critical services rather than focusing on the fate of any specific class of institutions.
- When developing recommendations substantially to reduce or eliminate a type of risk in one set of institutions is important to consider where that risk will migrate to within the financial system.
- In evaluating who will ultimately bear risk, the goal should be to have risk end up where it lowers the probability and/or reduces the cost of a systemic crisis.
- Policy analysts should recognize that policy changes will not only induce desired responses but also unintended responses designed to lower regulatory costs and raise safety net subsidies. Analysts are unlikely to anticipate fully all of the responses, but should at least seek to identify and mitigate the more obvious of the unintended responses.
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