FDIC regulatory cost-benefit analysis process needs fix, OIG says; 5 recommendations made

The cost-benefit analysis process of the federal insurer of bank deposits is “not consistent with widely recognized best practices,” and five recommendations are on the table to improve the procedures, according to a report issued Wednesday.

The Federal Deposit Insurance Corp.’s (FDIC) Office of Inspector General (OIG), in an evaluation report on the agency’s cost benefit analysis process for rulemaking, stated that cost benefit analyses are performed to “identify the key effects—both positive and negative—of various alternatives for a rule.”

The report stated that cost benefit analysis informs the agency and the public whether the “benefits of a rule are likely to justify the costs, or determines which of various possible alternatives would be the most cost effective.”

The five points recommended by the OIG for the agency to address were:

  • Set up procedures for conducting cost benefit analyses, including when and how the cost benefit analyses will be performed.
  • Define the roles and responsibilities for the agency’s Regulatory Analysis Section (RAS), and early involvement for the RAS in participating in and framing the initial policy direction of a rule.
  • Clearly define the chief economist’s roles and responsibilities for reviewing and concurring on cost benefit analyses performed.
  • Address how cost-benefit analyses and supporting information, such as scope and methodology, analyses, conclusions, and reconciliation to the FDIC’s final policy decision will be documented and published in the Federal Register to ensure transparency.
  • Conduct retrospective cost-benefit analyses on existing rules, including a regulatory risk assessment, as well as roles and responsibilities for the Driver Divisions, Chief Economist, and Division of Insurance and Research (DIR)/RAS.

In finding that the FDIC’s practices in conducting the analyses were not in line with other organizations’ best practices, the OIG outlined five shortcomings:

  • No process to determine when and how to perform cost benefit analyses (resulting in superficial analyses, inconsistency and limited public awareness and transparency). “Without thorough cost benefit analyses, the FDIC could implement or continue to enforce poorly conceived or overly burdensome rules,” the OIG wrote.
  • Limited use of the expertise of the agency’s Regulatory Analysis Section economists during initial rule development (resulting in possible “missed opportunities” to enhance the FDIC’s initial policy determinations).
  • No requirement for the agency’s the chief economist to review and concur on the cost benefit analyses performed (which the OIG called “an important quality control.”
  • Lack of consistent transparency in agency disclosure of cost benefit analyses to the public. “Without transparent cost benefit analyses, stakeholders such as financial institutions, the public, and Congress may not understand the FDIC’s analyses and conclusions, which may limit stakeholders’ ability to meaningfully participate in the rulemaking process. In particular, the final rules may not reflect the experiences and insights of the public, be appropriately crafted, or receive public acceptance. The rules may also need revision, requiring additional and unnecessary investments of FDIC resources.”
  • No cost benefit analyses after final rule issuance. “Without performing cost benefit analyses of existing rules or establishing a formal process to proactively review each final rule, the FDIC may not identify duplicative, outdated, or overly burdensome rules in a timely manner,” the OIG wrote. “In addition, the FDIC may not ensure that its rules are effective and achieve their intended objectives/outcomes.”

FDIC OIG: Cost Benefit Analysis Process for Rulemaking