Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications
![handle is hein.journals/ylr124 and id is 916 raw text is: JOHN C. COATES IV
Cost-Benefit Analysis of Financial Regulation: Case
Studies and Implications
A BS T R A C T. Some members of Congress, the D.C. Circuit, and the legal academy are pro-
moting a particular, abstract form of cost-benefit analysis for financial regulation: judicially en-
forced quantification. How would CBA work in practice, if applied to specific, important, repre-
sentative 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) Ba-
sel 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 -show that precise, reliable, quan-
tified CBA remains unfeasible. Quantified CBA of such rules can be no more than guesstimat-
ed, as it entails (a) causal inferences that are unreliable under standard regulatory conditions;
(b) the use of problematic data; and/or (c) the same contestable, assumption-sensitive macroe-
conomic and/or political modeling used to make monetary policy, which even CBA advocates
would exempt from CBA laws. Expert judgment remains an inevitable part 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.
A U T H O R. John F. Cogan, Jr. Professor of Law and Economics, Harvard Law School. Thanks
for helpful discussions - but no blame for the contents of this paper -should go to Stephen An-
solabehere, John Armour, Michael Barr, Ryan Bubb, John Campbell, Mark Cohen, Clarke
Cooper, Jim Cox, Paul Davies, Mihir Desai, Nancy Doyle, Eilis Ferran, Jeff Frieden, Jeff Gordon,
Howell Jackson, Robert Jackson, Louis Kaplow, Duncan Kennedy, Andrei Kirilenko, Bruce
Kraus, Alex Lee, Craig Lewis, John Manning, Miguel de la Mano, Tom Merrill, Robert Plaze,
Eric Posner, Connor Raso, Mark Roe, Paul Rose, Ava Scheibler, Hal Scott, Holger Spamann,
Suraj Srinivasan, Matthew Stephenson, Larry Summers, Cass Sunstein, Meg Tahyar, Dan Ta-
rullo, Adrian Vermeule, Chris Walker, Scott Westfahl, Glen Weyl, and Richard Zeckhauser, and
to workshop participants at Harvard Law School, Harvard Business School, Columbia Law
School, the Securities and Exchange Commission, the Commodity Futures Trading Commis-
sion, and the Public Company Accounting Oversight Board. Any errors are mine.
For disclosure of financial interests potentially relevant to this Article, see Faculty Disclo-
sures re: Related Outside Interests and Activities, HARv. L. SCH., http://www.law.harvard.edu
/faculty/COI/2o2_CoatesJohn.html [http://perma.cc/M3VN-8K2P]; and Faculty Disclosures re:
Related Outside Interests and Activities, HARv. L. SCH., http://www.law.harvard.edu/faculty/COI
/2013_CoatesJohn.html [http://perma.cc/TTH6-LNFE].
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Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications
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