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1 1 (January 14, 2025)

handle is hein.crs/govesbp0001 and id is 1 raw text is: Congressional Research Service Informing the Iegisl9tive debate since 1914 0 Updated January 14, 2025 Introduction to Financial Services: Regulatory Relief' The 119th Congress is considering whether to provide regulatory relief' in the area of financial services. This In Focus gives a broad overview of the policy trade-offs 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. Policy Trade-Offs In determining whether to provide regulatory relief, a central question is whether an appropriate trade-off has been struck between the benefits and costs of regulation. 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. A financial regulatory system that delivers a baseline level of stability and trust among financial agents is a precondition to a healthy financial system that can generate robust economic growth. Regulators employ different tools to achieve these goals. Regulators issue rules and guidance, supervise and examine institutions to verify that the rules are followed, and take 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 licenses before engaging in particular business practices. The specific goals regulators attempt to achieve and the tools they use vary by market. For example, risk management is emphasized for banking regulation, while disclosure is a priority in securities regulation. Costs. The costs associated with government regulation- rulemaking, supervision, and enforcement-are referred to as regulatory burden. 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 ultimately be 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. If regulatory burden reduces the long-term availability of credit, it would have a negative effect on business investment and economic growth. 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 regulations create one-time operating costs borne upfront, while others are recurring costs that exist as long as the requirement is in effect. Opportunity costs are the costs associated with forgone 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. Trade-offs. Regulatory relief may face trade-offs between reducing regulatory burden and potentially reducing the benefits of regulation. The trade-offs are not limited only to the effects on the direct recipients of relief-usually the providers of financial services-but also to the effects on consumers, investors, particular markets, and market stability more broadly. 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 regulation causes 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. Unduly burdensome could be defined as when costs are in excess of benefits or when the same benefits could be achieved at a lower cost. But the presence of regulatory burden does not mean that all regulations are unduly burdensome. Policymakers consider these trade-offs and evaluate the broader effects of regulation 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 potential actions taken by banks may drive up the cost for a bank to provide certain services and result in that activity migrating to a less regulated part of the financial system or to foreign jurisdictions with lower regulatory standards. However, trade-offs are not always present. If regulation makes an unstable system more stable, it could reduce cost and increase the availability of credit. Statutory Requirements to Consider Regulatory Burden Congress has required regulators to consider ways to minimize regulatory burden within the rulemaking process. For example, the Paperwork Reduction Act 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.

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