Harvard Law School Forum on Corporate Governance. David T. Zaring is the Elizabeth F. Putzel Professor of Legal Studies & Business Ethics at the University of Pennsylvania. This post is based on his recent paper, published in the Iowa Law Review. “Nobody should feel sorry for banks, necessarily, but they labor under heavy, and in almost every important way, unchecked, regulation. The prosperity of banks challenges some of the basic assumptions of American administrative law—that transparency and process create better regulation through sunlight and reasoned decision-making, that judicial review checks regulatory abuses where sunlight and reasoned decision-making do not, and that a utilitarian assessment of the merits of regulation is essential. The banking regulatory regime features none of these regulatory basics.

• Financial regulatory agencies do not rely on appropriations by Congress; rather, their budgets are generated by the fees they impose on banks, and in the case of the Federal Reserve System, profits that come from buying and selling government debt. This makes financial regulators legislatively unaccountable, and also reduces the executive influence of the White House, which negotiates with Congress on the rest of the budget.
• Bank regulators are also free from presidential control. Financial rules are not reviewed by the White House before being promulgated, as is the case for most of the rest of government. The President cannot remove appointees whose policymaking she disapproves of in most cases, reducing oversight by the executive branch.
• Banks rarely, if ever, litigate to undo rules imposed upon the industry or challenge enforcement actions levied on any particular bank. Many think the reason for this reluctance to sue their supervisors is based on fear that the supervisor will retaliate against the bank. Apart from sounding arbitrary in its own right, this means that the third of the three branches of government has essentially been cut out of participation in our system of financial regulation.
• The enforcement actions of financial regulators are often not publicized; banking regulators insist that the public will panic if they cannot keep their disciplinary measures secret. Financial regulation is therefore not transparent, and if, as Louis Brandeis said, “[s]unlight is . . . the best of disinfectants,” the lack of transparency could mask abuses.
• Banks are subject to rules set through an international process that makes domestic notice and comment requirements superfluous, at least in part, and makes it difficult for banks to monitor international policymaking, which is a strike against the role of public participation in setting standards.
• Banking regulation is done without the cost-benefit protections afforded to other industries. While the application of cost-benefit analysis to banking would not make a lot of sense, the application of this constraint, since the Reagan administration, has served as both a serious hurdle for regulators inclined to promulgate new rules and a different mechanism for executive branch control of administrative agencies. And yet, banks cannot take advantage of it.”