Using language that has got others into trouble before him, Timothy Geithner, US Treasury secretary, on Tuesday called financial regulatory reform “a just war” – words given substance by a legislative proposal unveiled the same day by Mr Geithner and Barney Frank, chairman of the House Financial Services Committee. The sweeping powers it grants the government – presumably those Mr Geithner wishes it had had during the financial paralysis last year – are what give the bill both its strengths and its weaknesses.

Under the law, no company engaged in financial activities would be able to hide from a new Financial Services Oversight Council. It would be empowered to seek all information it needs to determine whether an entity or an activity has systemic significance for overall financial stability. It would subject systemically important institutions – banks or non-banks – to potentially draconian requirements to mitigate risk to the financial system. And it would establish authority for the Federal Deposit Insurance Corporation to take control of such entities if they fail.

Together, the rules provide the government with tools to step in forcefully in a Lehman-like collapse, and – in principle – to reduce the risk that one would reoccur. The clear winner is a Federal Reserve with new powers: to foist higher capital standards on a company; halt its mergers or acquisitions; tell it to shed lines of business; or force it into bankruptcy.

This is controversial: the Fed, already under heavy criticism for being unaccountable, would act at its sole discretion once the council (where other agencies would be represented) deemed an institution systemically important. The Fed is best placed to assess financial stability risks, but this approach is dangerous. It risks an intellectual monoculture – which the council looks too weak to remedy. What is more, unless the Fed takes special care to be open and transparent, it will become a football, punted around Congress for every decision about individual institutions.

The Fed’s powers ought to be matched by incentives for the industry to act in ways that rarely call for their use. For that, markets must know what to expect, yet the bill sorely lacks transparency: it bans the naming of systemically important groups. This is silly: naming them would let the market charge them more for capital – or, by charging less, show its disbelief that authorities will let them fail.

Unpredictability also mars the otherwise highly welcome special resolution regime. The FDIC will be able to keep a failing financial group going until it can be wound down or sold off. The law says unsecured creditors must take losses – but allows them to be made largely whole (with the cost paid by rivals) if stability requires it. This hampers efficient market pricing of systemic risk.

Mr Geithner’s bill satisfies most of the just war criteria he appeals to: his cause is just, his intention right, his authority proper. In Thursday’s congressional hearing he must prove it passes a final test: a sufficient probability of success.

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