The possibility of reforming the Dodd-Frank Act – Congress' answer to the last banking crisis – has generated a healthy debate. While we should proceed with caution, reforming Dodd-Frank would not necessarily cause another crisis, so long as reforms still require commercial banks to fund themselves with more capital – think of sources of bank funding that aren't prone to bank runs, such as equity and long-term debt – to protect themselves against investment losses, reducing the likelihood of taxpayer bailouts.

Rather than worrying about Dodd-Frank reforms in general, we should worry about special interests discrediting the effectiveness of the so-called "leverage ratio," a simple measure of banks' capital adequacy often defined as equity relative to total assets.

First, some background on why it's important that banks fund with more, rather than less capital. The FDIC stickers you see at your bank signal that the government insures your deposits in case your bank becomes insolvent. A bank with less capital has incentives to overstate the value or understate the risk of what it is doing. When things start to go wrong, investors in the bank's capital experience losses first. So the more capital, the less likely the bank in question will become insolvent.

Successful Dodd-Frank reform means preserving capital requirements like the leverage ratio and avoiding "regulatory capture," a common occurrence in which an industry uses its influence in the regulatory process to satisfy its own interests, rather than the public interest.

This does not mean that an industry's interests never coincides with the public interest. That said, one tell-tale sign of regulatory capture is a complex regulatory code, rather than deregulation. That applies to so-called risk-based capital requirements that U.S. banks began adhering to a few years after the 1988 Basel Accords, which tend to reduce the amount of assets that banks have to fund with capital.

Political Cartoons on the Economy View All 302 Images

The existence of complex regulations can be explained by the fact that larger, established (and often politically powerful) firms benefit from "barriers to entry." Unlike their smaller existing competitors or potential new entrants to the industry, these larger businesses can hire compliance staff to navigate the complexity, and lobbyists to argue in favor of keeping regulations complex.

For instance, take the Clearing House Association, a trade group in existence since 1853. The association generally provides valuable information and research about the financial system, but in a letter last month to the Senate Banking Committee, it criticized an earlier letter to the committee from Federal Deposit Insurance Corporation Vice Chairman Thomas Hoenig.

What did Hoenig propose? Like Rep. Jeb Hensarling's, R-Texas, Financial Choice Act of 2017, the vice chairman has advocated eliminating the more complex risk-based capital requirements in favor of the simpler leverage ratio.

The Clearing House cites yet another source, a Treasury Department report, which states that the leverage ratio encourages risk-taking. But you might say the same thing about risk-based capital requirements. After all, leading up to the last financial crisis, many banks that were creating the very assets at the heart of the crisis also held more of them, after the Recourse Rule lowered their capital requirements. The letter even suggests that using the simple leverage ratio has only costs and no benefits.

In short, a strong faction within the finance industry would prefer complexity to a relatively straightforward capital requirement.

Yet, research released earlier this year shows that increasing the leverage ratio from 4 percent to 15 percent would generally yield greater benefits (in terms of smaller expected damage from crises) than costs (namely reduced lending, which the industry argues happens when banks fund with more equity). Other academic studies also show that a higher leverage ratio has benefits that outweigh the costs.

A recent working paper found that the optimal leverage ratio should be at least 15 percent. Another study published in the Journal of Financial Stability uses U.S. data and finds that doubling the leverage ratio from 8 to 16 percent would be best. Finally, a recent study published in the American Economic Review finds that when the leverage ratio is reduced below 15-18 percent, the economic harm to households from an ensuing crisis can be large.