Capital hill

THE Republican nominee for president may be all blather and bombast, but the party’s leadership in the House of Representatives is trying to make up for that by producing lots of weighty policy proposals. The latest, which Jeb Hensarling, chairman of the Financial Services Committee, plans to unveil this week, concerns financial regulation. Mr Hensarling wants to replace the Dodd-Frank act, the sprawling overhaul of America’s financial system instituted in the wake of the crisis of 2007-08, with something much simpler. His bill will not become law as long as Barack Obama wields a presidential veto, but it does add heft to the growing calls for reform.

Mr Hensarling says he is not targeting all of Dodd-Frank, “just 89.7%”. The alphabet soup of financial regulators would be vigorously stirred. For instance, the Consumer Finance Protection Bureau, an agency spawned by Dodd-Frank, would survive but with diminished independence and authority. Its funding would come from Congress rather than the Federal Reserve (and could therefore be cut if it strays); it would not be allowed to prohibit arbitration clauses in financial contracts; and it would no longer have a single boss but a bipartisan panel of supervisors. The bit of the Fed that regulates financial institutions, as opposed to setting interest rates, would also be subjected to Congress’s budgetary oversight. All regulators would be required to conduct cost-benefit analyses on any proposed new rule.

Bank supervision would get an even bigger shake-up. Mr Hensarling’s plan is based on three principles: that hefty capital requirements, rather than intrusive regulation, are the best way to make banks safe; that failing banks should not be bailed out; and that banks will always find a way to game complicated rules, so simple ones are preferable. So confident is Mr Hensarling in the appeal of his ideas that he would give banks a choice of operating under the current regulatory regime or opting out. The opt-outs, however, would have to fund themselves with equity worth 10% of assets, without any adjustment for their perceived risk. That is far more equity than the biggest banks have at the moment, especially ones with investment-banking operations, but not such a leap for more straightforward retail banks. At the same time, the Volcker rule, which aims to stop banks from trading on their own account, would be repealed.

No bank with 10% capital, Mr Hensarling says, failed during the financial crisis. The new requirement would approach the 13-16% levels of equity funding banks used before the creation of the Federal Reserve and government-backed deposit insurance in order to convince customers of their solidity. Big banks would probably be unenthusiastic, since they would have to shrink or raise lots of capital, curbing profits either way. But Mr Hensarling believes that small banks would be thrilled: “Speak to any community banker and they will tell you they are withering on the vine and the number one culprit is Dodd-Frank,” he says. “The sheer weight, volume, complexity and cost uncertainty of a regulatory burden cannot be amortised over a small earnings base.”

Elizabeth Warren, a Democratic senator and acerbic critic of big financial institutions, was quick to label the proposal a “wet kiss for the Wall Street banks”. She and her party have been slower, however, to admit Dodd-Frank’s flaws, let alone suggest any improvements. Mr Hensarling concedes that Dodd-Frank is unassailable for the moment. But he says he wants to show his fellow members of Congress, and voters, that there is a simpler, fairer, less interventionist way to keep wayward financial institutions in check.