Trends in Financial Regulatory Spending
In light of the recent financial crisis, it is useful to look at the trends in regulatory spending and staffing in the last 50 years. There is a misconception that deregulation, especially during the last eight years, has been the central cause of the financial crisis. In large part, this perception stems from the rhetoric of the Republicans in power at the time and their emphasis on the costly burdens that regulation places on business. As George Mason University Professor Tyler Cowen reminded us recently, rhetoric about regulation does not necessarily reflect reality. For instance, he wrote in the New York Times that, contrary to the myth,
[t]he [Bush] administration did little to alter a regulatory structure that was built over many decades. Banks continue to be governed by a hodgepodge of rules and agencies including the Office of the Comptroller of the Currency, the international Basel Accords on capital standards, state authorities, the Federal Reserve and the Federal Deposit Insurance Corporation. Publicly traded banks, like other corporations, are subject to the Sarbanes-Oxley Act.
And legislation that has been on the books for years—like the Home Mortgage Disclosure Act and the Community Reinvestment Act—helped to encourage the proliferation of high-risk mortgage loans. Perhaps the biggest long-term distortion in the housing market came from the tax code: the longstanding deduction for mortgage interest, which encouraged overinvestment in real estate.
In short, there was plenty of regulation—yet much of it made the problem worse.
For instance, a look at regulatory spending in this report shows an expansion in financial regulation spending, rather than a decrease. For the proposed 2010 fiscal budget, spending on regulatory agencies is to grow by 0.8 percent, following the 7.1 percent growth rate for last year and continuing a long-term expansionary trend. More specifically, for the regulatory category of finance and banking, inflation-adjusted expenditures have risen 45.5 percent from 1990 to 2010. This is relatively characteristic of the trend in the last 50 years. Figure 2 shows real federal spending on finance and banking regulations between 1960 and 2010. As we can see, with some exceptions, regulatory spending on finance and banking has steadily increased over the last 50 years. The last 10 years follow the same pattern.
Figure 2: Federal Spending on Finance and Banking Regulations, 1960–2010 (Click to Enlarge)
Finally, in FY 2010 spending on regulatory activity in the finance and banking subcategory is budgeted to grow 0.8 percent to reach $2.9 billion in 2010. This follows a 7.1 percent increase in 2009. Within this subcategory, the largest percentage increase occurs in the budget of the Financial Crimes Enforcement Network (16 percent) while the largest decrease (28.5 percent) occurs in the Office of Thrift Supervision.
Because of the current financial crisis, there might have been some expectation that spending in the finance and banking subcategory would be substantially higher in this report. Calls for comprehensive reform of the financial regulatory system have intensified in the past year. The FY 2011 budget will most likely include significant increases in this area. Some of the reforms likely to be considered in the 111th Congress include reform of the securitization process, federal regulation of credit-rating agencies, creation of a risk-management regulator, federal regulation of hedge funds, federal regulation of credit default swaps, and consolidation of federal financial regulatory agencies. There is even talk of creating a Consumer Financial Products Safety Commission.1
- James Hamilton, “Financial Regulation Reform: What to Expect in the 111th Congress” ( CCH White paper, 2008). [↩]
