Last week, White House press secretary Sean Spicer said Donald Trump remains committed to restoring a wall between investment and commercial banking in the United States. Meanwhile, bankers and their lobbyists probably snickered. Profits are higher than ever. And even though reinstating Glass-Steagall—the New Deal–era bank reform that achieved this very separation and was repealed by Bill Clinton in 1999—was part of the GOP platform last year, most Republicans in Congress haven't shown any interest in that kind of radical overhaul. Trump's Cabinet is also full of veterans from some of the country's biggest financial firms, like Goldman Sachs.
But now one federal official, who happens to be a Republican, has proposed what amounts to a return to Glass-Steagall as an act of deregulation: trading a dense thicket of complex rules for a couple that might be easier to enforce. In so doing, he's poised to change the debate on how Wall Street operates in America.
Thomas Hoenig, the Republican vice chair of the Federal Deposit Insurance Corporation (FDIC)—who has been rumored as a potential Trump nominee to a key spot on the Federal Reserve—released his bank reform proposal in a speech on Monday. Hoenig has long been an anomaly: a conservative who favors aggressively scrutinizing big banks. And he walked that tightrope in this speech, speaking the language of deregulation while promoting a deep intervention into the current system.
"We could pare back the thousands of pages of rules that inhibit bank performance and level the competitive playing field without undermining the stability of our financial system and economy," Hoenig said.
The plan, which you can read here, doesn't exactly split up big banks, Bernie Sanders–style, as much as it segregates their activities. (Sanders also supports restoring Glass-Steagall, which is probably why it ended up in Hillary Clinton's platform, too.) Under Hoenig's proposal, any "non-traditional banking," like securities trading, investment advising, hedge fund or private equity sponsorship, and nearly all derivatives activities—you know, the risky stuff—would be legally separated into an affiliate, with its own management team, its own independent auditor, even its own class of stock. The "traditional bank," which takes deposits and processes payments, would have an affiliate as well, inside the same parent company.
Only traditional banks would enjoy access to what Hoenig calls the "safety net," meaning deposit insurance, access to cheap Federal Reserve loans, and other government assistance. If the non-traditional bank affiliate got into trouble, it would be responsible for covering its own losses. The parent company couldn't even supply the non-traditional bank with more than a small percentage of funding.
In exchange for this, Hoenig proposes eliminating a series of regulatory requirements, including stress tests that measure how banks would fare in a crisis, "living wills" banks must file to explain how to unwind them if they fail, and enhanced supervision of large firms. Hoenig envisions replacing them with one other simple rule: a ratio of liquid assets to overall debt—known as the leverage ratio—of 10 percent, across the parent company and its affiliates.
That 10 percent number is critical, because it's the same as what's in the financial reform bill offered by Jeb Hensarling, the Republican chair of the House Financial Services Committee. Of course, Hensarling's CHOICE Act also rolls back Obama regulations on banks in exchange for a 10 percent leverage ratio—and some are rightly raising the alarm about a potential return to chaos brought to you by shady bankers. But Hoenig reportedly shared his plan with Hensarling's staff before the speech, and he's clearly trying to steer the GOP into accepting a real trade-off: reducing complexity while segregating bank activities.
Watch the VICE News Tonight segment on the murder trial involving a teenage girl that has sparked a movement.
Again, Hoenig doesn't go full Occupy Wall Street here and break up the banks. But by "ring-fencing" risky financial activities, similar to proposals moving forward in the United Kingdom, his plan would achieve something deceptively radical. The goal of ring-fencing is to prevent chaos in the trading markets from seeping into the rest of the financial system—and the economy. Denying government support to non-traditional banking means less funding available for trading activities, and by extension, fewer of them. The proposal creates a smaller set of rules that regulators might be able to monitor. And it may even fix the real problem with mega-banks: that they've become too politically influential. (Bank lobbyists recently launched a "candidate school" encouraging their friends to run for office.) Competing management teams within the same parent company could create internal tensions on what to lobby for, fragmenting their overwhelming power.
The proposal is not without its problems. Having traditional and non-traditional banking affiliates inside the same company creates a jumble of entities that could prove hard to track. And the 10 percent leverage ratio, while higher than the current 6 percent standard, remains too small, according to bank capital expert and Stanford Professor Anat Admati, who has proposed a ratio three times higher.
But Hoenig's trying to start a conversation about the virtues of a smaller but more targeted approach to regulating America's biggest financial institutions. It doesn't assume the free market can solve every problem, but it doesn't micromanage everything a bank does either. It may not stop every risk, but the idea is to make shareholders pay for those risks, instead of taxpayers. Even left-leaning Wall Street reform groups like Better Markets quickly praised the plan as "serious and deeply thoughtful."
Of course, an FDIC chair giving a speech is not likely to spark an immediate legislative overhaul—and that probably wasn't even his intention. Banking reforms in America typically only emerge after a point of crisis. But after 2008, supporters of structural reform didn't have a plan for how to achieve their goals; amid that vacuum we got Dodd-Frank, which made some tweaks to the existing system. Those were important but, in Hoenig's view, inadequate. Now, there's a bipartisan menu full of ideas floating around.
In other words, when the next crisis hits—and it will—reformers will be ready.
Follow David Dayen on Twitter.