Bank regulators have gone too far

In recent weeks, two Republican congressmen have raised serious questions about the actions of the banking regulators. Representative Jeb Hensarling from Texas is the chairman of the House committee on financial services. Rep. Hensarling wrote a letter to the four heads of the key bank regulatory agencies, part of which states:

"In recent months, however, I have become concerned that in conducting their safety-and-soundness supervision, some regulators may be relying not only on the largely objective CAMELS indicators but also on subjective judgments of what constitutes 'reputational risk.'"

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Dick Bove

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Similarly, Darrell Issa, a California representative who is the chairman on the committee of oversight and government reform released a staff report, which states:

"Operation Choke Point was created by the Justice Department to 'choke out' companies that the Administration considers a 'high risk' or otherwise objectionable, despite the fact that they are legal businesses …

"The Department lacks adequate legal authority for the initiative."

Unrestrained power

These two representatives are beginning to understand that there is something seriously wrong with bank regulation and litigation in the United States today. In 2010, Congress gave the regulators dramatically expanded authority to regulate banking in this country. The banking regulators have acted upon the wishes of Congress and established a series of new rulings that have recast the structure of financial services in America. Everything from originating mortgages, handling credit- and debit-card payments, the use of bank deposits, the structure of bank capital, and literally hundreds of other changes have been mandated and put in place.

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The Department of Justice has similarly acted upon the supposed will of the people to fine, punish, and otherwise castigate the industry. There has been no restraint on any of its activities because the people support its actions and the banks have refused to take any of these issues to court. The banks have refused to do this because they run the risk of being further fined or sued if they do so. Plus, they could literally lose their banking charters should the Justice Department and the regulators decide to take these charters away.

Subjective decisions

Lacking any force to restrain their actions, the regulators and the Justice Department have slipped over into the mentality that any action that they take is acceptable. With Operation Choke Point, however, at least the two legislators above are beginning to understand that this new regulatory alignment is now going too far.

Operation Choke Point has the ability to unite the NRA and the Planned Parenthood Association. This is because the two entities, regulators and Justice Department, have now decided that they will tell the banks who they can lend money to and who they cannot. If the banks refuse to listen, this regulatory alliance has indicated that they can and will coerce the banks to follow what they have been told to do.

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To this point, the banks have meekly abided by what they have been ordered to do. They are refusing short-term funding to many businesses that they have been told are objectionable, one of which is gun dealers. If there were a change in administrations in the next election, the banks could be told to stop providing funds to birth-control clinics and they would immediately do so.

Maybe this is not right

What the two Republican legislators are beginning to realize is that subjective decision-making by a very small number of bureaucrats can shut down industries from receiving funding. These bureaucrats may be making these decisions based upon their personal moral compasses or because they have been told there is a political benefit to doing so, whether the business is legal or not is not part of the decision-making process.

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Whatever the reason for their actions, Justice and the bank regulators are acting. They are telling banks to shut down industries that are involved in legal businesses and the banks are doing it. Finally, someone in power is beginning to question what is happening.

Commentary by Richard X. Bove, an equity research analyst at Rafferty Capital Markets and the author of "Guardians of Prosperity: Why America Needs Big Banks" (2013).