“LEFT TO OUR own devices,” said Lloyd Blankfein, boss of Goldman Sachs, in February, “we wouldn’t hold as much capital as we are holding.” He is not alone. “It is clear that the banks have too much capital,” wrote Jamie Dimon of JPMorgan Chase, America’s biggest bank by assets, in a letter to shareholders last month.

American banks, both big and small, are chafing. Since 2009 the 33 banks deemed to be “systemically important”, which are subject to stress tests by the Federal Reserve, have added $700bn in common equity. The eight banks considered to be of global systemic importance (G-SIBs, in banking parlance) must meet not only the capital and leverage requirements agreed on by international supervisors after the crisis (see article) but also additional surcharges levied by the Fed. Among other changes, Mr Dimon wants this “gold-plating” to go.

Perhaps most irritating to the banks are the Fed’s annual stress tests, estimating how much equity would be burned up in a hypothetical crisis. The Fed may also limit banks’ dividends and share repurchases if it finds they do not have enough capital in the worst scenario. Banks are given plenty of information about the imaginary catastrophe—but not about the models the Fed uses in the tests. It is hard, they mutter, to hit a moving target in the dark. The Fed, however, does not want banks to arrange their balance-sheets merely to meet the test. Daniel Tarullo, the designer of the Fed’s stress-test apparatus, who stepped down as a governor last month, said in a farewell speech that the tests needed refining but that they had to adapt to new risks, and that publishing models would “result in less protection for the financial system”.

Bankers freely admit that they had too little equity before the crisis. Now they say they have too much. Mr Dimon points out that under the worst scenario in the Fed’s stress test last year, the 33 banks’ hypothetical losses amounted to $195bn. That is bound to be an overstatement: the test assumes that each and every bank will be the worst affected. But it still amounts to less than 10% of their combined loss-absorbing resources. They are now required to hold so much capital, Mr Dimon writes, that lending and the American economy are being held back.

The banks grumble about a surfeit of rules as well as of capital. The Fed’s first stress tests predated, by a year, the Dodd-Frank act of 2010, which recast American financial regulation. The law runs to 848 pages. It abolished one watchdog but created two more, the Consumer Financial Protection Bureau (CFPB) and the Financial Stability Oversight Council, which is made up of the heads of regulatory agencies and is chaired by the treasury secretary. It laid out procedures for dealing with bankruptcy of systemically important banks, using public money if need be. In all it imposed 390 requirements for which regulators had to come up with new rules. According to Gabriel Rosenberg of Davis Polk, a law firm, only 279 have been finalised. Banks moan that the regulation of mortgages—more than half of which are now originated by non-banks—is especially fiendish.

The Dodd-Frank act has thickened the “spaghetti soup”

Complaints about red tape extend far beyond Wall Street. America has a total of around 5,900 banks, all but 100-odd of which hold assets of less than $10bn, a category dubbed “community” banks; indeed, more than 5,000 of them hold less than $1bn. Community banks, like their bigger peers, say regulation is costing them too much and restricting lending.

Community banks have plenty of other problems as well. They lack scale; their risks are locally concentrated; and they face competition not only from bigger banks but also from online lenders. Already one-fifth of small businesses—the community banks’ staple—look to online lenders when seeking a loan. Small banks have been in decline for decades (see chart). Stephen Cecchetti, of Brandeis University, and Kim Schoenholtz, of New York University’s Stern School of Business, point out that this downward trend did not accelerate after Dodd-Frank.

Still, extra regulation has not helped. Karen Mills of Harvard Business School, a former head of the federal government’s Small Business Administration, says that Dodd-Frank has thickened the “spaghetti soup”. In particular, community banks’ ability to make loans of under $150,000 has been weakened. Although they are exempt from many of the regulations governing large institutions, such as supervisory stress tests, the fixed costs of regulation weigh more heavily on smaller lenders. “Bank presidents are really thinking about regulation more than serving customers,” says Hester Peirce, of the Mercatus Centre at George Mason University in Washington, DC.

Do a big number

If Hillary Clinton had been elected president last November, bankers’ best hope for regulation might have been more of the same. Mr Trump, by contrast, has promised to “do a big number” (meaning a radical cutback) on the Dodd-Frank act. No one knows how big. All Mr Trump has done so far is to issue an executive order listing seven unobjectionable principles for financial regulation (sample: “foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis”) and to instruct the treasury secretary to assess by early June whether existing laws can deliver these objectives. A separate proclamation has paved the way for easing rules on financial advisers’ duties to their clients.

Nothing much is likely to happen soon, although ideas are in the air. Gary Cohn, Mr Trump’s chief economic adviser, has mused about a “21st-century version” of the Glass-Steagall act, a Depression-era law, repealed in 1999, that forced the separation of commercial and investment banking. Separately, Republicans in the House of Representatives have said that they want to pass a bill to replace Dodd-Frank by the summer. But the new administration wanted to concentrate on replacing Barack Obama’s health-care law (over which it came a cropper) and on reforming taxes. And although Mr Trump has a treasury secretary in place, Steven Mnuchin, other jobs in the department that require approval by the Senate, plus many that do not, have not yet been filled.

Passing new legislation may anyway be tricky. Although the Republicans have majorities in both the House and the Senate, they lack the 60 votes needed to break a filibuster (debating a bill for so long that it runs out of time) in the upper house. Persuading eight Democrats to join them appears a tall order for anything that looks like a sop to Wall Street, but some sound keen on Mr Cohn’s Glass-Steagall idea. Budgetary measures can be passed with a simple majority. That may allow Republicans to restrict funding for (and perhaps restructure) the CFPB, which is financed through the Fed rather than directly by Congress, or perhaps to gut Dodd-Frank’s bankruptcy procedure.

There may be broad agreement on some areas. One is that small banks’ burden should be eased, for instance via complete exemption from the Volcker rule, which bans banks from trading most securities for their own profit, and from owning private-equity and hedge funds, and which was aimed at big institutions. It helps that community banks have plenty of congressional clout. Another is that the threshold of $50bn in assets for designating a bank as systemically important, and so subject to detailed stress-testing, is too low. The smallest are no systemic threat, and the limit discourages otherwise sensible mergers that would push banks above it. The Fed has already eased some requirements for smaller systemic banks.

It should also be possible to loosen the reins without new laws. Dodd-Frank gives regulators a fair amount of discretion, and Mr Trump will be able to choose a number of new ones. Most important (and possibly imminent) is a replacement for Mr Tarullo, long a thorn in the banks’ sides, to oversee financial stability at the Fed. Two other slots at the central bank are vacant. Thomas Curry’s term as the Comptroller of the Currency, who oversees national banks, ended on April 9th. And in November Martin Gruenberg’s term as chairman of the Federal Deposit Insurance Corporation (FDIC) is due to run out.

Jeb Hensarling, chairman of the House Financial Services Committee, intends to revive legislation that he proposed last year. At the core of his Financial CHOICE (Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs) act is indeed a choice: banks can opt to maintain a leverage ratio, of equity to total liabilities, of 10%, in return for exemption from such burdens as minimum ratios of equity to risk-weighted assets laid down in international banking standards, “living wills” setting out how they could be wound up if they went bust, and those pesky stress tests. With enough equity, the theory goes, a failing bank would be no risk to the taxpayer and so could be left in peace. If it overreached, only its shareholders would suffer.

A book published in March by academics at the Stern School and NYU’s law school, “Regulating Wall Street: CHOICE Act vs Dodd-Frank”, compares the two acts, section by section. It argues that Dodd-Frank has made the American financial system safer, both since the crisis and relative to those of other large countries; but its many pages and associated rules have not got to the heart of systemic risk, and are more burdensome than necessary. So does CHOICE represent an improvement?

Start with a tick in its favour. The Volcker rule, the NYU team concludes, could go. It is supposed to stop banks using deposits insured by taxpayers to fund risky proprietary trading. But it was not such trading that caused the crisis, and the rule does not reduce risk enough to justify the burden of compliance. Banks complain that they must send reams of data to regulators daily to show that they are complying. They say that if the rule were scrapped they would not reopen proprietary trading desks anyway. A separate study, by consultants at Oliver Wyman, finds that the Volcker rule and similar regulations in Europe may have harmed liquidity in some important markets, including repos, which provide short-term funding, corporate bonds and commercial mortgage-backed securities, because banks now hold much less of such stuff on their balance-sheets.

Neither Dodd-Frank nor CHOICE, says the NYU team, tackles important flaws in American regulation. The country has lots of different watchdogs, and who oversees what depends on a company’s legal form rather than its economic function. Its property and mortgage markets are distorted by Fannie Mae and Freddie Mac, which guarantee almost all housing loans. Both laws leave these problems untouched.

CHOICE’s central bargain—10% leverage in return for less regulation—may make sense for smaller, non-systemic banks. For the bigger ones, it looks like a bad deal both for the banks themselves and for the wider economy. Eliminating stress tests for systemically important banks, argue the NYU authors, “could be catastrophic”. One of them, Philipp Schnabl, says the point is not how much capital banks have in normal times but how much they have in hand when trouble arrives. And because leverage ratios treat all assets as equally risky, banks may have an incentive to increase risk—and hence, they hope, returns—while keeping the ratio constant. You need risk-weighting too.

Moreover, measuring leverage is not as simple as it looks. American accounting principles, known as GAAP, allow banks to offset derivative exposures on the asset and liability sides of their balance-sheets. International standards, or IFRS, restrict this possibility, because the liabilities will still exist in bankruptcy. Balance-sheets are therefore smaller, and leverage ratios larger, under GAAP than under IFRS.

This matters. Thomas Hoenig, vice-chairman of the FDIC, is no fan of regulatory risk-weighting. He thinks it is fine for banks to use it internally, but not for supervisors to decide priorities for them, pointing out that “I cannot predict the future.” So he also favours leverage ratios of at least 10%—but for all banks, and on the IFRS measure. In December, America’s eight G-SIBs had a combined leverage ratio of 8.2% under GAAP but only 6.3% under IFRS. In the 2008 crisis, Mr Hoenig notes, their losses amounted to 6% of tangible assets.

Disentangling risk

He recently put more flesh on his proposals. Dodd-Frank was “well-intended”, he says, but its “many and complicated” regulations are too burdensome for all banks, especially small ones. For the largest ones, he thinks, the law has “served to enshrine too big to fail”. He suggests that big banks should split commercial and investment banking into separately capitalised and managed subsidiaries, each capable of entering bankruptcy without public support. The FDIC would insure deposits in the commercial subsidiary (as before), which would be subject to a leverage ratio of at least 10%; the investment-banking arm’s requirement would be based on risk, but should be no less than that of stand-alone broker-dealers today (8.4%). In return, big banks could be freed from a whole array of regulations, including stress tests and living wills. The idea, Mr Hoenig notes, is similar to the “ring-fencing” of retail banks in Britain, due in 2019. (Mr Cohn could also be thinking along these lines.)

Others say that 10%, however you measure it, is not enough. In “The Bankers’ New Clothes”, published in 2013, Anat Admati of Stanford and Martin Hellwig of the Max Planck Institute for Research on Collective Goods proposed a minimum of 20%. The Federal Reserve Bank of Minneapolis estimated last year that Dodd-Frank had cut the chance that big American banks would need another public bail-out at least once in the next 100 years only from 84% to 67%. To reduce the probability to 9%, it proposed the equivalent of a leverage ratio of 15%. Banks that fell short after five years would see the bar raised, eventually to 24%.

Underlying all this is a divergence between what suits a big bank and what suits the economy as a whole. Unsupervised, banks are likely to issue too little capital, because they do not take into account the effect of a systemic crisis on other banks or on the economy as a whole. That is why the biggest face more demanding capital rules and stress tests. The alternative is to force them to have so much equity on their balance-sheets that they can fail without bringing down the lot. Mr Dimon argues that the banks have already passed that point: “Essentially, too big to fail has been solved—taxpayers will not pay if a bank fails.” The question now is whether Mr Trump appoints supervisors who agree with Mr Dimon.