Beasts of Regulatory Burden

Jack Hartings, President of the Peoples Bank Co. of Coldwater Ohio, and Vice-Chairman of the Independent Community Bankers of America (ICBA), wrote an op-ed recently in the Cleveland Plain Dealer, speaking to the issue of regulatory burden on community banks.  He proposed several actions that might reduce regulatory burden on community banks.  One of which is: "Require cost-benefit analyses by regulators to ensure quantitative justification of new regulations."

His position echoes a plank in ICBA's Plan for Prosperity:

"Rigorous and Quantitative Justification of New Rules: Cost-Benefit Analysis.  In addition, the agencies would be required to identify and assess available alternatives including modifications to existing regulations. They would also be required to ensure that proposed regulations are consistent with existing regulations, written in plain English, and easy to interpret.  Provide that financial regulatory agencies cannot issue notices of proposed rulemakings unless they first determine that quantified costs are less than quantified benefits.  The analysis must take into account the impact on the smallest banks which are disproportionately burdened by regulation because they lack the scale and the resources to absorb the associated compliance costs."

It's a bit bewildering.  Why does this continue to be an issue 33 years after the passage of the Regulatory Flexibility Act of 1980 and the issuance of numerous Presidential Executive Orders requiring such to be the case?

For readers of the National Bank Examiner who might not be familiar with the rulemaking process at the federal level, the Administrative Procedures Act of 1946 governs the way in which agencies of the Federal Government propose and establish regulations.  There have been several subsequent legislative updates to its rulemaking requirements including two with burden-reducing intent: the Regulatory Flexibility Act of 1980 (5 USC 601 et seq.) and the Paperwork Reduction Act of 1980 (44 USC 3501 et seq.).

Absent urgent matters or other emergencies, where prior notice may be legally waived, generally a Notice of Proposed Rulemaking (NPR) is issued by the agency (or agencies) of jurisdiction soliciting public comment prior to the issuance of a Final Rule.   The NPR is required to be published in the Federal Register. 

Occasionally, when a regulatory agency is unsure about the regulatory approach to take on an issue, it may issue an Advance Notice of Proposed Rulemaking (ANPR).  An ANPR typically solicits ideas and comments from the public to questions posed by the staff of the regulatory agency prior to an eventual issuance (or non-issuance) of a NPR.

Federal-level rulemaking that may impact "small entities", as defined by the Small Business Administration (SBA), generally must include a Regulatory Flexibility Analysis as required by the Regulatory Flexibility Act.  The SBA has defined "small entities" for banking purposes to include banks or savings associations with $175 million or less in assets.

In the Small Business Administration's Guide to the Regulatory Flexibility Act (RFA), it states that:

 "The RFA requires federal agencies to consider the impact of regulations on small entities in developing the proposed and final regulations. If a proposed rule is expected to have a significant economic impact on a substantial number of small entities, an initial regulatory flexibility analysis must be prepared. The initial regulatory flexibility analysis or a summary of it must be published in the Federal Register with the proposed rule.

An initial regulatory flexibility analysis is prepared in order to ensure that the agency has considered all reasonable regulatory alternatives that would minimize the rule's economic burdens or increase its benefits for the affected small entities, while achieving the objectives of the rule or statute. The analysis describes the objectives of the proposed rule, addressees its direct and indirect effects and explains why the agency chose the regulatory approach described in the proposal over the alternatives.

Under Section 603(b) of the RFA, each initial regulatory flexibility analysis is required to address: (1) reasons why the agency is considering the action, (2) the objectives and legal basis for the proposed rule, (3) the kind and number of small entities to which the proposed rule will apply; (4) the projected reporting, recordkeeping and other compliance requirements of the proposed rule, and (5) all federal rules that may duplicate, overlap or conflict with the proposed rule.

While these five factors are necessary elements to an adequate [initial regulatory flexibility analysis], they are not the sole factors necessary to perform an adequate analysis. Most important, section 603(c) requires that each initial regulatory flexibility analysis contain a description of any significant alternatives to the proposal that accomplish the statutory objectives and minimize the significant economic impact of the proposal on small entities. These alternatives could include the establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; the clarification, consolidation or simplification of compliance and reporting requirements under the rule for small entities; the use of performance rather than design standards; or an exemption from coverage of the rule or any part of the rule for small entities.

Although agencies often overlook this possibility, regulatory flexibility alternatives may include less stringent requirements for all regulated entities or for different classes of regulated entities. [my emphasis]"

Since reducing regulatory burden is one of those mom-and-apple-pie issues, successive Presidents of the United States have issued Executive Orders (EOs) setting policy guidelines for the regulatory rulemaking process, all generally applying to executive branch agencies.   Like the Office of the Comptroller of the Currency, for example.  Currently those Executive Orders that still apply to regulatory planning and review are President Clinton's EO 12866 (as amended), and President Obama's EO 13563, 13579, and 13610.

All of the rulemaking-related Executive Orders, to the present day, give a nod and a tip-of-the-hat to quantitative cost-benefit analysis.  President Clinton's EO 12866, (20 years ago in 1993) states:

(a) The Regulatory Philosophy.  Federal agencies should promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling public need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people.  In deciding whether and how to regulate, agencies should assess all costs and benefits of available regulatory alternatives, including the alternative of not regulating.  Costs and benefits shall be understood to include both quantifiable measures (to the fullest extent that these can be usefully estimated) and qualitative measures of costs and benefits that are difficult to quantify, but nevertheless essential to consider. [my emphasis]  Further, in choosing among alternative regulatory approaches, agencies should select those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity), unless a statute requires another regulatory approach.

So what gives? Why are distinguished bankers and banking trade associations continuing to complain about the lack of credible or reliable quantitative cost-benefit analysis in the federal rulemaking process?  One hopes that it can't be just because they may not like the rulemaking results.

Community bankers need to hold bank regulatory agency management accountable for complying with the letter and, more importantly, the spirit and intent of the law and policy guidance.  Particularly holding accountable those newbies in that carousel of an executive suite over at the Consumer Financial Protection Bureau (CFPB).

In a previous blog post, I mentioned that community bankers will continue to get it as long as they continue to take it.  It's time to stop taking it when it comes to required regulatory flexibility analyses that may be interpreted or perceived as superficial, perfunctory, lightly documented, narrowly focused, overoptimistic, self-justifying, or lacking creative regulatory alternatives.

We need to stop complaining about something that is already supposed to be taking place.  Community bankers and their trade associations should endeavor to enforce a measure of substantive accountability to existing legal and policy requirements for federal rulemaking.  Perhaps through the congressional oversight process first.