The Cost of Financial Services Reform

The CBO released its analysis of the the Wall Street Reform Act last Friday. The bill will cost, according to the non-partisan group, a mere $4.5 billion added to the deficit from 2010 to 2019. There was a time when that number was high, but given number inflation due to the massive spending bills of the past two years, it seems to be a drop in the bucket. Though for taxpayers that money could buy a lock of buckets.

But the true cost of the bill is more than the CBO can score. Here is a breakdown of the seven parts of the Wall Street Reform Act and what the CBO does and does not count:

The Financial Stability Improvement Act creates a systemic risk oversight board with sweeping new powers to deal with financial firms considered too big to fail:

The CBO estimates this provision will at $3 billion to the deficit by 2019 from direct spending. This assumes, though, that the FDIC will recovery any losses from the guarantees it will offer financial institutions in an expanded role. This furthermore does not take into account the financial benefit of cheap credit that large firms get from the too big to fail label, creating unfair competition between them and smaller firms.

The Corporate and Financial Institution Compensation Fairness Act requires that public companies allow the shareholders to approve executive compensation packages:

The CBO doesn’t think this will cost anything. But it will increase costs for firms and complicate the management process. With a required vote from shareholders, managers will begin to think even more short term than before, as the politics of being a CEO increase.

The Over-the-Counter Derivatives Markets Act requires all financial products like derivatives be traded on an open exchange:

The CBO doesn’t score this part. While a transparent exchange isn’t a bad idea in principle, any limitation this legislation puts on the ability for private actors in the market to exchange goods and services limits growth in the economy. The standardization of products for the exchange is only beneficial if unique products can still be freely created.

The Consumer Financial Protection Act creates a new, independent financial services regulatory agency to take over supervisory and enforcement authority regarding consumer financial products:

The CBO estimates the CFPA will increase deficits by $1.1 billion over the next ten years, from an increase in spending and decrease in revenues. The CBO states that the legislation will decrease the profitability of firms thereby decreasing federal income and payroll taxes.

The Private Fund Investment Advisers Registration Act requires increased registration of private pools of capital and subjects more of the capital markets to SEC oversight and compliance requirements:

The CBO estimates this provision will increase revenues by $1 billion over the next ten years, but also cost $1.4 billion, expanding the 2019 deficit another $0.4 billion.

The Accountability and Transparency in Rating Agencies Act subjects rating agencies to more accountability for their failures and contains more stringent conflicts of interest requirements:

The CBO doesn’t score this. Much of the rating agency changes are positive or simply won’t really have an impact.

The Investor Protection Act would require increased fiduciary duty responsibilities for brokers-dealers and investment advisers and expand oversight over all types of investment advisers:

The CBO says this will have no impact on the deficit. However, the specific laws mean that virtually every individual that offers some level of investment advice will be subject to fiduciary standards currently only for brokers. This will increase costs, particularly for the consumer. Increased consumer costs mean less taxable revenue, decreasing federal tax receipts and impacting the deficit.

The Federal Insurance Office Act creates a new office in the Treasury Department to coordinate national insurance regulations:

The CBO doesn’t score this. If this office is able to develop national charters for insurance policy, it could greatly benefit the market by enhancing competition.

Read the whole statement from the CBO here.