Accountability and Independence in Financial Regulation: Checks and Balances, Public Engagement, and Other Innovations

I INTRODUCTION Financial regulation attempts to balance two competing administrative goals. On the one hand, as with much of administrative law, accountability is a core goal. Accountability undergirds the democratic legitimacy of administrative agencies. On the other hand, unlike with much of administrative law, independence plays a critical role. (1) Independence helps to protect financial regulatory agencies from political interference and--with some important caveats--arguably helps to guard against some forms of industry capture. In addition, with respect to the Federal Reserve (the Fed), independence serves to improve the credibility of the Fed's price stability mandate by insulating its decisionmaking from politics and, in particular, from the political pressure in favor of easy money during election cycles. These values, of course, are in tension. "Too much" accountability--at least in some forms--may reduce independence. "Too much" independence--at least in some forms--may reduce accountability. Moreover, steps to meet one or the other of these goals may also affect the efficacy of the organization. Having a financial regulatory system that properly balances accountability and independence, but fails to protect households from abuse and the real economy from the catastrophic failure of the financial sector, cannot be anyone's goal. To foster accountability, scholars of administrative law have looked to congressional oversight, presidential control, and judicial review. (2) Each of these has its own weakness and has been the subject of extensive academic debate, but, as has been pointed out elsewhere in this issue, this literature is often not concerned with, or even aware of, the literature discussing financial regulation. (3) Yet financial regulation often raises unique problems that may not neatly align with the literature on administrative law mechanisms of congressional oversight, presidential control, or judicial review. In the context of financial regulation, congressional oversight may be somewhat muted, for example, by the budgetary independence of most financial regulatory agencies. That budgetary independence is designed in part to reduce the ability of the financial industry to lobby Congress to cut or condition agency funding on particular enforcement or regulatory outcomes. Congress also tends to delegate to financial agencies significant, core questions regarding financial institution supervision, such as capital rules. Presidential control of financial agencies is often viewed with some suspicion, out of fear of improper political interference in enforcement and supervision, and since the New Deal, financial regulatory agencies have been given a great deal of independence through a range of practices. (4) Although judicial review plays an important role in cabining financial agency action, such oversight exists at the edges, with significant aspects of financial regulation committed to agency discretion under broad congressional delegations. Many financial regulatory decisions involve probabilistic judgments about risk, such as whether a bank's failure might lead to financial panics, which are not readily subject to judicial second-guessing. Moving from the mechanisms of oversight to its procedural norms, an important aspect of legitimacy is transparency and expertise: showing that the decisionmaking is based on the right substantive standard and arrived at through the right procedural means---on informed, data-driven expertise rather than on some arbitrary basis. (5) An expertise-driven model began as a response to the market failures that spurred the Great Depression and the resulting demand for regulatory action. (6) Unsurprisingly, administrative agency expertise is one of the primary factors shaping judicial review of agency action. (7) Further, transparency in financial regulation has long been championed in the United States. Justice Brandeis, pointedly writing about the risks of oversized financial trusts, famously called sunlight "the best of disinfectants. …