The OIRA Model for Institutionalizing CBA of Financial Regulation

This Essay is a brief response to the stimulating essays on cost-benefit analysis of financial regulation by Professors Coates and Cox in this volume. Both Coates and Cox largely agree that we want policy decisions about financial regulation to be made using what Coates refers to as “conceptual cost-benefit analysis (CBA).” However, both express some skepticism about quantified CBA in financial regulation. Coates observes that he has yet to find a single example of a “reliable, precise quantified CBA of a significant financial regulation,” despite significant efforts to identify one. This stands in stark contrast to many other regulatory domains in which highly sophisticated, quantitative CBA plays a central role, including environmental, health, safety, and antitrust regulation. Why is financial regulation such an outlier with relatively little CBA? Coates’s explanation is that CBA of financial regulation is “an order of magnitude more difficult than its advocates seem to believe.” But CBA plays little role in financial regulation not because CBA of financial regulation is especially challenging but rather because we have not created institutional structures that produce incentives for financial regulators to develop and employ CBA. Centralized regulatory review within the executive branch — the OIRA model that has been so successful in other regulatory domains — should be applied to spur the institutionalization of CBA of financial regulation.