New bank agency bad idea

The strength of America's banking industry lies in its ability to foster competition and innovation. That's the strength of the free market in general. It's also a strength that comes with inherent risks. Congress and the president have the preposterous notion they can remove risks and keep the economy strong.

That's the premise behind the proposed new Consumer Financial Protection Agency, which won approval recently from the House Financial Services Committee. This new bureaucracy, which has the support of President Barack Obama, would have broad powers to regulate banks in an effort to protect consumers. In the process, however, it would certainly stunt innovation.

Committee Chairman Barney Frank, D-Mass., bristled last week when critics said this new agency might spell the end of consumer products such as credit cards that offer frequent-flier miles. Not true, he said. That may be so, because frequent-flier miles are ingrained in the economy. But if a bank were to offer something new that no one had thought of previously, what then? The new agency would have the power to set rules, ban products and hand out penalties. As its charge would be to minimize risks, the natural inclination would be to curb innovative thinking.

Before it could emerge from the committee, the bill underwent several changes, most of them good. It was stripped of its requirement that banks offer so-called "plain vanilla" versions of no-frills mortgages or credit cards. Also, all banks with less than $10 billion in assets, and credit unions with less than $1.5 billion, were exempted from new, additional examination requirements.

But what remains in the bill offers much reason to worry. State laws would take precedence over federal laws in many cases, subjecting large banks, except those that could demonstrate they would be harmed, to up to 50 different sets of rules.

Most importantly, however, the bill would set up one review for how a bank deals with consumer protection, and another to examine its own financial health. Those two aspects cannot be separated without the danger that one review would cause harm to the other.

The only way for any government to completely remove risk from an economy is to control it so tightly that no one can prosper. But "nothing ventured, nothing gained" is hardly a good slogan for economic recovery. The recent financial crisis was caused mainly by congressional mandates that financial institutions lend to more low-income people. That was an inherently risky requirement, and it led to innovations that made such practices profitable, but only for awhile. And plenty of federal regulators missed warning signs that risks were getting out of control.

The notion that Washington now can set up a new bureaucracy to tightly control banks and credit unions while helping consumers at the same time is absurd.