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The move aligns with President Donald Trump's broader push to shift the balance of power in the administrative state
But policy experts say the new directive is rife with potential downsides for the banking sector, by eroding the influence of subject-matter experts on rulemaking and opening the door to wild swings in policies from one administration to the next.
"Banking issues are not knee-jerk political calls. They can be complex, and there are some areas in which tougher rules are widely agreed to be useful," said Karen Petrou, managing partner of Federal Financial Analytics. "What [the order] does is, as we began to see in the last Congress, it makes the process — not only of bank regulation, but also supervision — expressly and now entirely political."
On Tuesday evening, Trump
The Trump administration, by contrast, appears to be embracing a legal school of thought known as
Trump's order subjects these agencies to "performance standards and management objectives" set by the White House Office of Management and Budget. It also calls for independent agencies to submit new regulations to the Office of Information and Regulatory Affairs for review before proposing or finalizing them.
Susan Dudley, a professor at George Washington University's Trachtenberg School of Public Policy and Public Administration and the administrator of OIRA under President George W. Bush, noted that the office is staffed by career civil servants who make policy assessments free of political influence. By making independent agencies accountable to them, she said, the government is simply holding them to the same standards as cabinet-level departments.
"There have long been concerns that independent agencies' justifications for their rules were not based on the same transparent and rigorous analysis that executive branch agencies have conducted for theirs," Dudley said.
In particular,
While industry voices have called for cost-benefit analysis in financial regulation for years, there are reasons why such an analysis may not apply neatly to banking rules. Jeremy Kress, a University of Michigan professor and former Fed lawyer, said banking regulators have traditionally underplayed cost-benefit analysis because the potential tradeoffs are difficult to quantify with precision.
"One of the reasons why cost-benefit analysis might not be appropriate in a financial regulatory context is that it's really hard to estimate the value of avoiding a crisis," Kress said. "We'll see how persuasive the cost-benefit analyses are that come out of this administration."
But others say that, while difficult, the task is not impossible.
"I'm less sympathetic to that argument," Dudley said. "After all, in banking, they're already talking in terms of dollars and cents. Is it really harder than measuring or quantifying the trade-offs of environmental rules or public health?"
Still, Dudley said the new requirements will undoubtedly slow down the rulemaking process by adding additional steps and opening it up to greater debate, including on matters of statutory interpretation. Under the order, regulators will have to defer to the Department of Justice on readings of authorizing legislation rather than their own in-house counsel.
Graham Steele, a former Biden Treasury official and now current fellow at Stanford University's Rock Center for Corporate Governance, said this requirement could cause rules that are ultimately implemented to be less effective and out of step with congressional expectations.
"A lot of those statutes are very broad and delegate a lot of authority to the agencies to use their specialized expertise in a very technical area like financial regulation, to use their judgment," Steele said. "Now, you've got a whole bunch of non-experts at the White House, at OMB and the Department of Justice coming in and second-guessing that."
Steele also noted that the additional review could create a "bottleneck" for new rules and guidelines across the government, including those that might seek to reduce regulatory burdens or otherwise improve oversight.
Perhaps the most consequential element of the order is its new budgetary requirements, which apply even to self-funded agencies like the Fed, the FDIC and the Office of the Comptroller of the Currency. These agencies are now required to discuss their budgets with the director of OMB, who will be empowered to prohibit certain allocations and direct unspent funds — which, in the case of the FDIC and the OCC, come from assessments on banks — to the government.
Unlike the rulemaking requirements, which would seem to give the administration a check on policies put forth by agencies, these budgetary controls coupled with new mandates from the OMB could make it easier for the administration to proactively steer agency pursuits.
"OMB could say to the OCC, 'You're spending too much on examination, cut it in half … and any reserves you have in your assessments, you have to give them to us,'" Petrou said. "And I would not put it past them to do that."
The prospect also raises the threat of politically motivated enforcement or supervision, Kress said.
"Supervision is supposed to be an apolitical, data-driven process," he said. "But there's the potential, with White House control over supervision, that enforcement actions could be taken for political reasons, or licensing and chartering decisions could be made for political reasons."
The specter of this new oversight dynamic looms large for all independent agencies, but none more than the Federal Reserve. While the executive order explicitly carves out the Fed's monetary policy function from the new oversight, some legal and policy specialists question whether that division can hold up in practice.
Peter Conti-Brown, a prominent Fed scholar and legal studies professor at the University of Pennsylvania's Wharton School for Business, said the Fed's various functions — as a regulator, supervisor, payments system operator and monetary policymaker — are all deeply intertwined.
"Is discount window policy regulatory, supervisory, or monetary? Emergency lending? Master account review? It is relevant to all of these," Conti-Brown said. "As the saying goes, if you pick up one end of the stick, you pick up the other. The Fed is a single stick. I think it is impossible to make these separations as cleanly as the [executive order] supposes."
