The Volcker Rule As Structural Law: Implications For Cost-Benefit Analysis And Administrative Law

John C. Coates, IV

Harvard Law School

August 3, 2015

ECGI – Law Working Paper No. 299/2015

Abstract:

The Volcker rule – a key part of Congress’s response to the financial crisis – is best understood as a “structural law,” a traditional Anglo-American technique for governance of hybrid public-private institutions such as banks and central banks. The tradition extends much farther back in time than the Glass-Steagall Act, to which the Volcker Rule has been unfavorably (but unfairly) compared. The goals of the Volcker Rule are complex and ambitious, and not limited to reducing risk directly, but include reshaping banks’ organizational cultures. Another body of structural laws – part of the core of administrative law – attempts to restrain and discipline regulatory agencies, through process requirements such as cost-benefit analysis (CBA). Could the Volcker rule be the subject of reliable, precise, quantified CBA? Given the nature of the Volcker rule as structural law, its ambitions, and the current capacities of CBA, the answer is clearly “no,” as it would require regulators to anticipate, in advance of data, private market behavior in response to novel activity constraints. If administrative law is to improve regulatory implementation of structural laws such as the Volcker Rule, better fitting and more nuanced tools than CBA are needed.

The Volcker Rule As Structural Law: Implications For Cost-Benefit Analysis And Administrative Law – Introduction

The best-known section of Congress’s response to the financial crisis – the “Volcker rule,” section 619 of the Dodd-Frank Act – is a “structural law,” with implications for efforts to use cost-benefit analysis to enhance regulatory accountability as the rule and others like it are implemented. After briefly characterizing structural laws, this article places the Volcker rule in historical context, as part of a long tradition of Anglo-American attempts to use structural laws as a technique for governance generally, and of hybrid public-private institutions such as banks and central banks in particular. The article then outlines how another set of laws and institutions, developed later and reflected in administrative law, have been used to constrain regulatory agencies, including those overseeing capital markets, by imposing special procedures and analytical requirements before rules can be changed, such as “cost-benefit analysis,” to enhance the policy-neutral accountability of the agencies, but also as a non-neutral political tool of the banks themselves. Finally, the article asks whether – as others have argued – structural laws such as the Volcker rule should be subject to legally mandated, quantified cost-benefit analysis. Unlike some commentators,2 the article gives an answer – no – that is both consistent with U.S. legal traditions, and based on common sense, given the nature of the Volcker rule as structural law and the current capacities of cost-benefit analysis. The analysis here, it is hoped, casts light both on the Volcker rule and on the potential value (and risks) of legal mandates for cost-benefit analysis in administrative law generally.

I. A brief history of structural laws in Anglo-American financial history

A. Structural laws generally

Different laws function differently. One type of law – a structural law – attempts to create a “structure” that will organize, constrain and channel activity. Structural laws create and provide for the governance of organizations (e.g., a regulatory agency, such as the Federal Reserve Board, a quasi-public corporation, such as the Federal Deposit Insurance Corporation, or quasi-private corporations, such as systemically important financial institutions), institutions (e.g., a system of connections, such as a road, computer, or payment system, or a market, such as a stock exchange), and physical objects (e.g., the blue mailboxes used by the U.S. Postal Service, buildings, safe deposit boxes, nodes of the internet). Structures can be built by affirmative government action (as with a highway system or the Fedwire payment system) or through laws aimed at private or partly private persons (as with regulations of financial markets such as the New York Stock Exchange).

Not all laws are structural. Many are direct commands aimed at private individuals or entities, such requirements to pay income taxes. Other laws consist of simple mandates, to make specified disclosures or to maintain specified capital levels, for example. Others are simple bans aimed at behavior that is socially undesirable, such as theft and fraud.

The Volcker Rule As Structural Law: Implications For Cost-Benefit Analysis And Administrative Law

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