U.S. Fed forms cost-benefit analysis unit as "calibrating," efficiency to guide regulation

Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee on his nomination to become chairman of the U.S. Federal Reserve in Washington, U.S., November 28, 2017.

NEW YORK (Thomson Reuters Regulatory Intelligence) - The U.S. Federal Reserve is forming a unit to assess the economic impact of financial regulations and ensure they fulfill their intended goals, as a top fed official called for rules to be calibrated and efficient to avoid adverse consequences.

The so-called “policy effectiveness and assessment” unit will be staffed with experienced Fed economists. About half of the expected staff or eight to 10 people has been hired, Fed spokesman Eric Kollig said. There is not yet a formal schedule or work-product targets established for the unit.

Unlike the Office of Financial Research, a largely independent research unit nominally under the Treasury, this new unit will firmly be a part of the Federal Reserve System, within the existing supervision and regulation division and integrated into the rule-writing process.

The unit – mentioned briefly by incoming Federal Reserve Chair Jerome Powell during his confirmation hearing in November 2017 - is intended to build on and expand the already existing cost-benefit analysis work of the Federal Reserve. These are largely delivered as white papers on topics such as capital surcharges(here) or single-party counterparty credit limits(here).

The cost-benefit focus is in line with President Donald Trump’s “core principles” for regulating the U.S. financial system, but plans for the unit had already been in the works for well over a year, predating the Trump presidency, a Fed official said.

An emphasis on more regulatory cost-benefit analysis, nonetheless, has long been urged by advocates of reduced federal regulation, including over financial markets. It also follows the example of the UK, which has engaged in such analyses of the financial sector regulations through the Financial Services Authority and Financial Conduct Authority.

Powell’s earlier reference to the cost-benefit unit was given more shape in a speech by Federal Reserve Vice Chair Randal Quarles last Friday. Quarles said some financial regulations had a potential for unintended adverse consequences and perverse incentives despite a well-intentioned initial design.

“Efficiency of regulation can be improved through a variety of means. For example, it can mean achieving a given regulation’s objective using fewer tools. It can mean addressing unintended adverse consequences to the industry and the broader public from a regulation or eliminating perverse incentives created by a regulation. It can mean calibrating a given regulation more precisely to the risks in need of mitigation. It can also mean simpler examination procedures for bank supervisors, or less intrusive examinations for well managed firms. In our approach to assessing post-crisis regulation, we should consider all of these ways of improving efficiency,” he said.

(Bora Yagiz, FRM is a New York-based Regulatory Intelligence Expert for Thomson Reuters Regulatory Intelligence, specializing in risk.)