The House Financial Services Committee, chaired by Jeb Hensarling, R-Texas, held a hearing on June 26 titled "Examining How the Dodd-Frank Act Could Result in More Taxpayer-Funded Bailouts."

The hearing promised to present a spirited debate between more or less conservative critics of Titles I and II of the Dodd-Frank Act, which supposedly empower the financial regulators to end the policy of "too big to fail."

Sheila Bair, former chairman of the FDIC and one of the leading defenders of the administration's policy, was evidently called by the committee's Democrats, who are entitled to name a witness for any hearing panel.

The other panelists were Thomas Hoenig, current vice chairman of the FDIC and former president of the Federal Reserve Bank of Kansas City, and Richard Fisher and Jeffrey Lacker, current presidents of the Federal Reserve Banks of Dallas and Richmond, respectively.

Hoenig and Fisher have both called for the breakup of the too big to fail banks in speeches reported previously, while Lacker is known as one of the most conservative members of the Federal Open Market Committee and his bank is the regulator of Bank of America, which is near the top of anyone's list of too big to fail banks.

What followed was a spirited, sometimes informative, discussion of the provisions of Dodd-Frank that call for the designation of systemically important (read "dangerous") financial institutions (SIFIs) and arrangements for their unwinding in a process claimed to be more workable than bankruptcy would mean in practice.

In his opening statement, Hensarling charged that Dodd-Frank fails to end too big to fail, but instead creates a new bailout system that calls into question whether Washington can control the risk that too big to fail banks will continue to load up on risky assets like sovereign debt.

The ranking Democrat, Maxine Waters, D-Calif., asserted that "not enough attention has been placed on the actual text of the law," and she warned the audience that Democratic members would be doing just that throughout the hearing.

Among the panelists, Bair stood out as the defender of Dodd-Frank's resolution provisions, which she largely drafted, and as the chief denier that the fail to end too big to fail. Then she immediately stated that to the extent the problems of too big to fail remain, it is because regulators have more work to do to put the wind-down processes in place and that markets continue to question whether the government can and will follow through. She insisted that this effort is on the right track but concluded that "more can, and should, be done."

Steps that she advocates include a requirement that institutions maintain sufficient long-term debt at the holding company level and that the Financial Stability Oversight Council (FSOC) move to designate potentially systemic non-banks for heightened oversight. Bair added that bankruptcy should be the preferred resolution method and that the Orderly Liquidation Authority (OLA) process, authorized in Title II of Dodd-Frank, that critics attack should be used only as a last resort.

She recommended several steps to reduce the likelihood OLA would come into play, including improved public disclosure of the activities and risks of the institutions.

In that vein, the three other panelists brought troubling facts to light in support of proposals they offer to bring credibility to the task of ending too big to fail.

Hoenig and Fisher have both been warning of the growing size of the too big to fail banks. If one uses International Financial Reporting Standards (IFRS), rather than generally accepted accounting principles (GAAP), JPMorgan Chase's assets alone represent 25 percent of the nation's gross domestic product (GDP), and the eight largest financial institutions would reach $16 trillion, equivalent to the entire GDP of the United States.

Hoenig recoils at the fact that the federal safety net has been extended to the risky non-banking activities of these institutions, and he proposes that federal support be accorded only to traditional banking activities. Further, he would impose a uniform 8 percent capital requirement across all banks and a capital standard as high as 15 percent for the too big to fails, without crediting intangible assets like goodwill and including items now held off the balance sheet.

Hoenig also offers specific proposals to address the risky short-term funding practices of the too big to fail banks, including requiring money funds to maintain floating net asset values and changing the bankruptcy laws to eliminate the automatic stay for repurchase agreements based on mortgage-backed securities.

In a similar proposal to Hoenig's, Fisher suggested that counterparties in transactions outside the scope of traditional banking be required to sign an acknowledgement that their positions would not be guaranteed by the government. Lacker attributed the phenomenon of too big to fail to "two mutually reinforcing propositions: protecting short-term funding and the expectation that policymakers will intervene to protect creditors."

He presented statistics showing that about a third of the country's liabilities are backed by explicit guarantees and another quarter by implicit guarantees. While he is almost as critical of Dodd-Frank as Hoenig and Fisher, Lacker is closer than they are to Bair in contending that the Dodd-Frank Act provides a roadmap for needed regulatory changes and that it is worthwhile to establish the right incentives to make the resolution process work.

Spencer Bachus, R-Ala., a strong defender of JPMorgan CEO Jamie Dimon, asked the panel if the banking industry in this country might not be placed at a competitive disadvantage if stronger capital requirements were put in place.

Hoenig responded that strong capital would be a sound platform for the industry to compete in global markets.

The hearing skirted an overriding problem with the entire reform enterprise. If the United States and European Union were to implement stronger capital standards that would be difficult to game and would be based on tangible, rather than regulatory capital or political capital, the fundamental weakness of the industry's business plan may be exposed.

If the authorities in both the United States and European Union go forward with joint plans to build a safer global financial system, the industry will have to work even harder to press its position, supported by many members of the committee and backed by a strong program of lobbying and political contributions, that capital and reduced leverage constitute impediments to economic recovery and job creation.