Date Published: March 25, 2019
Publisher: Public Library of Science
Author(s): Shawn Mankad, George Michailidis, Andrei Kirilenko, Hubert Janos Kiss.
Following the 2007-2009 financial crisis, governments around the world passed laws that marked the beginning of new period of enhanced regulation of the financial industry. These laws called for a myriad of new regulations, which in the U.S. are created through the so-called notice-and-comment process. Through examining the text documents generated through this process, we study the formation of regulations to gain insight into how new regulatory regimes are implemented following major laws like the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act. Due to the variety of constituent preferences and political pressures, we find evidence that the government implements rules strategically to extend the regulatory boundary by first pursuing procedural rules that establish how economic activities will be regulated, followed by specifying who is subject to the procedural requirements. Our findings together with the unique nature of the Dodd-Frank Act translate to a number of stylized facts that should guide development of formal models of the rule-making process.
Financial crises induce large societal costs in the form of direct bailouts or through slower economic growth as a consequence of firm and household debt reduction . Both costs were borne by the public in the aftermath of the 2007 financial crisis . Accordingly, driven by public outcry, governments around the world responded with stricter regulatory frameworks. The European Union introduced a number of supervisory bodies (European Banking Authority, European Securities and Markets Authority, etc.) and internationally the Financial Stability Board was created with the mandate of promoting international financial stability. In the United States, enhanced oversight and regulation was introduced through the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act. This new regulatory framework marked the beginning of a new epoch of greater regulation  and was proclaimed by lawmakers and then President Barack Obama as “a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression” [4, 5]. Indeed, the Dodd-Frank Act covered a vast array of topics in its 540 sections .
Here we synthesize the full breadth of results presented above with respect to the overall rule-making process and in particular the potential strategies of the government and public. To our knowledge, we are the first in the public comment rule-making literature to uncover dynamics illustrated with the case study on swaps shown in Fig 3; Specifically, we find that the government proposed rules that had different quantitative features in the first year post-Dodd-Frank compared to later rule-makings. For instance, the rules in the initial sub-period tended to be shorter and more litigious. Combining these statistical results with a careful reading of the rules, we find that these rules also tended to create new procedures and financial operating standards for instruments and markets that were fully defined at a later date. As such, potentially driven by the heightened uncertainty from the public’s perspective around the economic significance and compliance of the new regulatory regime, public participation was also heightened in this initial sub-period as shown visually and supported by the negative binomial regression model results. While the data to understand the true motivations and causal factors leading to greater public commentary is not available, we do find anecdotal evidence that the public was alerted by the uncertainty around the new regulatory apparatus. Quoting from Prosperity Bank’s chairman and CEO, David Zalman , “I’ve been in banking since 1978, and today, probably over half of my time is spent with regulatory requirements. The regulatory burden is a threat to traditional community banking. It is troubling that we don’t always know what the regulators are going to want.” Industry trade publications  and corporate blogs [26–28] wrote about reporting requirements for swaps being finalized when the regulatory definition of swap was not yet known.
All statistical analysis was performed in R version 3.4.4 . Text-analysis was performed using the “tm”  and “topicmodels”  packages. The Cox proportional hazards model was estimated using the “survival” package .