Put away your pitchforks. The business of bashing banker bonuses has swerved into dangerous territory. It's one thing to curse Goldman Sachs Group for setting aside $11.4bn (€8.1bn), or 49% of its revenue, for employee compensation during the first half of this year. Taking a huge Wall Street investment bank's name in vain, for better or worse, has become socially acceptable behaviour. Heated words are understandable.

That's because US taxpayers would bear the costs if a behemoth such as Goldman, JPMorgan Chase or Morgan Stanley were to blow up one day after paying its employees billions of dollars to take risks that they ended up misjudging. This is why many Americans want the Federal Reserve and other regulators to start scrutinising employee-compensation incentives at too-big-to-fail companies. The point isn't to protect the companies, but the public at large.

Somehow that reasonable, if mildly populist, message must have spun out of control by the time it reached Barney Frank, chairman of the House Financial Services Committee in Washington. While lots of people got angry about the bonuses paid by AIG and the like, there has been little demand for lawmakers to respond by subjecting every pint-sized financial institution's pay practices to government review. If Frank and his fellow Democrats have their way, though, this is what US institutions soon might have to do.

Under a bill approved last week along partisan lines by Frank's committee, seven regulatory bodies – from the Fed down to the National Credit Union Administration Board – would be required to enact new rules prohibiting "any incentive-based payment arrangement" that "the regulators determine encourages inappropriate risks".

The rules, with details to be determined later, would cover every US financial institution with at least $1bn of assets. In addition to banks, credit unions and other financial companies, it also could wind up covering hedge funds.

The bill, which goes further than the Obama administration's proposals to regulate compensation, defines an inappropriate risk as one that "could threaten the safety and soundness of covered financial institutions", or that "could have serious adverse effects on economic conditions or financial stability".

Each of the various regulators, including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp, would be charged with enforcing these rules at companies under their respective jurisdictions. Hedge funds would fall under the Securities and Exchange Commission's oversight, should Congress approve a separate White House proposal requiring them to register as investment advisers.

Perhaps some investors might enjoy watching the SEC order their fund managers to stop charging them 2% of assets and 20% of profits for achieving the remarkable feat of matching the Standard & Poor's 500 Index. Let us remember, though, that hedge funds didn't threaten to bring down the global financial system, at least not this time.

Those companies, to name a handful, were Bear Stearns, Lehman Brothers Holdings, Merrill Lynch & Co, Fannie Mae, Freddie Mac, Citigroup, Wachovia, Washington Mutual and AIG.

The average American doesn't care if the guys who ran no-name shops such as Downey Financial Corp or Temecula Valley Bancorp turned their banks' stocks into doughnuts and got carted away by the FDIC. It was the regulators' job to prevent their lending practices from getting out of control in the first place, whether they got that way because of perverse pay incentives or for other reasons.

The regulators blew it. Failures happen. That's what the FDIC's insurance fund is for. The government shouldn't overreact to its own gross negligence by imposing systemic-risk controls on companies that don't pose systemic risk. There's also no reason to believe the regulators would be better at evaluating future risks, just because they have new powers to wield.

That this legislation casts such a wide net means its impact would be spread across too many places where there's no need. Bureaucrats would be authorised to pass judgment on the intricate details of some small-fry lender's Christmas checks for junior loan officers, even if the company didn't have public shareholders and never took money from the government's Troubled Assets Relief Program (TARP).

It wouldn't matter if the company posed no risk to the financial system, or if the adverse economic effects of its failure would end at the county line, or if the civil servant assigned to mind its pay practices wasn't qualified to do more than complete a checklist. Judging by the hundreds of zombie banks the US government isn't bothering to seize now – many of them still classified as "well capitalised" – there aren't enough able regulators to go around as it is.

This unabashed reach for wage controls was tacked onto a perfectly good proposal that investors have been fighting for years to get enacted – a requirement that all publicly owned companies hold non-binding shareholder votes each year to approve their executives' compensation packages. Public shame is a powerful weapon. As badly as many shareholders want so-called say-on-pay, though, this isn't a fair exchange.

The author is a Bloomberg News columnist. The opinions expressed are his own.