By Patrick O'Conner
WASHINGTON—During Jeb Hensarling's first congressional bid, a man at a campaign stop in Athens, Texas, asked the Republican if he was "pro-business."
"No," the candidate replied, drawing curious stares from local business leaders who had gathered to hear him speak, a former Hensarling aide recalled. "I'm not pro-business. I'm pro-free enterprise."
Now, more than a decade later, that distinction has Wall Street on edge. The new chairman of the House financial services committee wants to limit taxpayers' exposure to banking, insurance and mortgage lending by unwinding government control of institutions and programs the private sector depends on, from mortgage giants Fannie Mae and Freddie Mac to flood insurance.
Banks and other large financial institutions are particularly concerned because Mr. Hensarling plans to push legislation that could require them to hold significantly more capital and establish new barriers between their federally insured deposits and other activities, including trading and investment banking.
"A great case can be made that we need greater capital and liquidity standards," the conservative 55-year-old Texan said in a recent interview. "Certainly, we have to do a better job ring-fencing, fire-walling—whatever metaphor you want to use—between an insured depository institution and a noninsured investment bank."
In interviews, a half-dozen industry representatives expressed some level of anxiety about Mr. Hensarling's legislative agenda. However, because the chairman hasn't offered details yet, they were reluctant to speak publicly about his plans."Republicans are becoming much more populist; they're going after every big institution—big business, big government, big labor," said John Feehery, a former GOP leadership aide who now advises large financial firms. "It sounds good in principle, but there could be some major economic ramifications."
Mr. Hensarling inherits the chairman's gavel as many Republicans appear to be growing cooler to big business. Prominent conservatives have called on the GOP to loosen its ties to Wall Street. Other leading Republicans, including Senate Minority Leader Mitch McConnell (R., Ky.), have vowed to root out "crony capitalism," the practice of rewarding specific industries or companies with taxpayer-funded subsidies or safety nets.
Earlier this month, all 45 Senate Republicans voted for a symbolic measure aimed at banks with more than $500 billion in assets. The amendment, offered by Sens. David Vitter (R., La.) and Sherrod Brown (D., Ohio), sought to eliminate any subsidies or other advantages enjoyed by the biggest financial institutions because investors expect the government to prevent them from collapsing.
This wave of conservative populism was inspired, in part, by Republican eagerness to shed their image as the party of high finance and big business after the results of the last election.
Mr. Vitter said the renewed scrutiny "repositions Republicans away from being for mega-business and, quite frankly, the Mitt Romney caricature," referring to the 2012 GOP presidential candidate whose private-equity career fueled attacks that Republicans cared more about the rich and well-connected than middle-class Americans.
Most congressional Republicans believe the changes enacted in the wake of the 2008 financial crisis—principally in the Dodd-Frank financial reform bill—enshrined the notion that the biggest institutions are "too big to fail" because they guaranteed the government would step in to prevent the most sprawling firms from going under. "We have gone from an implicit guarantee to an explicit guarantee," Mr. Hensarling said.
In contrast, most regulators and advocates for Dodd-Frank argue that the new law provides taxpayers with another layer of protection by outlining the process for orderly liquidation of failed institutions.
Mr. Hensarling is leading the charge against the new law, but his attempts to replace it with other restrictions could face stiff resistance in the full House, as well as the Senate controlled by Democrats.
He doesn't yet have a specific plan, but his oft-stated goal is to repeal the orderly liquidation authority contained in Dodd-Frank, which he says perpetuates taxpayer-funded bailouts of big banks. At the same time, he has shied away from more aggressive measures, such as limiting the size of banks or reinstating the Glass-Steagall Act, which walled off commercial and investment banking activity.
Mr. Hensarling has expressed interest in reworking the way regulators judge the riskiness of certain debt—which affects how much capital banks must hold—so banks don't have incentives to hold, say, Greek debt instead of small-business loans.
Bank lobbyists and other industry advocates worry that any bill passed by his committee could serve as a template for further reform if another financial scandal spurs Congress to act. For now, the financial sector is reserving judgment.
"The financial services industry shares Chairman Hensarling's goal of making sure that no institution is too big to fail and that taxpayer dollars are never again on the hook," said Rob Nichols, president of the Financial Services Forum, a Washington-based advocacy group for the banks and insurers.
Hensarling deputies warned lobbyists for the biggest firms that Republicans would relish a public feud with Wall Street if the financial sector aggressively opposes their efforts, according to lobbyists and lawmakers familiar with those conversations.
The tough talk from Republicans like Mr. Hensarling has left some Democratic critics of the banks slightly surprised—and skeptical that the GOP is sincere in its effort to target a frequent ally. "In my 10 years on the committee, I cannot recall when Republicans supported a position that was contrary to the biggest banks," said former Rep. Brad Miller (D., N.C.), a member of the Financial Services panel until his retirement earlier this year who advocated tighter restrictions on the biggest banks.
Certainly the financial industry has lent Republicans plenty of financial support. In the 2012 election cycle, Republicans received 68% of the nearly $650 million that banks, insurers and other financial sector companies contributed to federal candidates, according to the Center for Responsive Politics. Commercial banks, insurers and other financial-sector firms contributed more than $1.3 million to Mr. Hensarling and his political action committee in the cycle.
Still, since coming to Congress in 2003, Mr. Hensarling has been a vocal critic of taxpayer backstops for the private sector. He voted against the Wall Street rescue package in the fall of 2008 and supported measures to ease the importation of prescription drugs. He even picked a fight with one of the largest employers in his backyard—American Airlines—by supporting initiatives to allow more long-distance flights out of Dallas's Love Field, the home base for rival Southwest Airlines.
Now, his other potential targets include: the Export-Import Bank of the U.S., which makes loans to American companies that do business overseas, and the Terrorism Risk Insurance Act, a temporary backstop created in the aftermath of 9/11 to insure construction projects. The latter measure expires at the end of 2014, unless Mr. Hensarling's committee acts to extend it.
"In every jurisdictional area that I can get my fingers on, I want to move us away from the Washington insider economy," he said.
Mr. Hensarling sharpened his free-market views when he studied economics under former Sen. Phil Gramm at Texas A&M University. He later asked Mr. Gramm for a job, giving him his start in politics. Mr. Gramm is well known as a free-market advocate and for his efforts to balance the budget. But he also co-wrote a law in the late-1990s that allowed large financial-service companies to consolidate. Critics of deregulation blame that law for allowing Wall Street firms to become "too big to fail."
Mr. Gramm said his protégé has held firm in his belief that government should stay as far away from the private sector as possible, even if the business community welcomes the help. "He's not the flavor of the month; he is what he believes," Mr. Gramm said. "It's a very admirable quality."
Mr. Hensarling has a similar message for the army of lobbyists who petition his committee: "If they thought I was a chairman to promote business interests as opposed to free enterprise, then they have not watched my career closely."
A version of this article appeared March 29, 2013, on page A1 in the U.S. edition of The Wall Street Journal, with the headline: Texan's Plans Put Wall Street on Edge.