"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."