A Choice for Wall Street

The House votes for a sturdier, less politicized financial system.

While everyone else in Washington watched the Jim Comey show, the House delivered Thursday on a campaign promise: Voting 233 to 186 to repeal parts of the 2010 Dodd-Frank financial law, which has hampered economic growth and helped the large banks the bill intended to punish after the financial panic of 2008.

Dodd-Frank is built on the conceit that the same regulators who missed the last crisis will somehow predict the next one as long as they have more power. But there will inevitably be another mania and panic, and regulators always miss them. The definition of a financial mania is that everyone thinks the good times will last forever.

Financial Services Chairman Jeb Hensarling’s Financial Choice Act addresses this tragic flaw by offering banks an option: Stay subject to Dodd-Frank’s costly regulations, or hold capital equal to 10% of assets in return for more lending freedom and less red tape.

Banks lend with taxpayer-insured deposits, and high levels of capital are a guardrail for taxpayers and shareholders. If the guardrails are high enough, banks can afford to take more risks without bank examiners second-guessing every loan. We’d prefer even higher capital levels, but Mr. Hensarling is raising the bar while moving banks away from their Dodd-Frank status as de facto public utilities.

Democrats call this a favor to Wall Street, but note that the biggest banks oppose the Hensarling bill. They’ve prospered under Dodd-Frank because they can more easily absorb compliance costs than can smaller competitors. By one estimate the average capital ratio of the seven largest banks is around 7%, while most regional or community banks hold 10% or more in capital.

The big banks have also grown bigger, with the five largest now holding more than 40% of U.S. banking assets. Some industry consolidation was inevitable after the crisis, but community banks have been selling out or closing at a rapid rate. The Federal Reserve Bank of Richmond reports that from 2010 through 2013 only four new banks were started in the U.S. Before the panic the average was 100 a year. All of this has cut lending for new small businesses essential for faster economic growth.

Meantime, taxpayers are on the hook as much as they were in 2008. The Richmond Fed reports that about $27 trillion in the private economy carries an explicit or implicit federal guarantee, or more than 60% of the financial system’s liabilities.

The Choice Act would limit potential bailouts by ending Dodd-Frank’s “orderly liquidation authority” that allows the Federal Deposit Insurance Corp. to wind down a failing institution. The bill establishes a new chapter of the bankruptcy code to liquidate a firm quickly without arbitrary political interference.

Dodd-Frank was written so loosely that the Trump Administration has broad regulatory power to ease the rules without Congress. But the law’s regulatory architecture is so deeply flawed that it needs a more durable reform. The GOP should grab whatever reform victories it can for the good of the economy and the rule of law.

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