Fed should not be super-regulator -U.S. senator

WASHINGTON May 19 (Reuters) - The Federal Reserve should not be made into the United States' super-regulator under an anticipated shake-up of how the country's banks are governed, a senior Republican lawmaker said on Monday.

"I think, myself, that we should not give the Fed all the regulatory power," Sen. Richard Shelby, the top Republican on the Senate Banking Committee, told CNBC.

"They have a lot of power now. They are our central bank and they are also our biggest bank regulator and they have other powers. The SEC has got their role," he said.

The Securities and Exchange Commission oversees investment banks Morgan Stanley (MS.N), Lehman Brothers Holdings LEH.N, Merrill Lynch MER.N, Goldman Sachs (GS.N) and Bear Stearns BSC.N for liquidity and capital levels.

But the Fed has allowed these firms access to its discount window, normally reserved for commercial banks, which it does regulate and for whom it is the lender of last resort.

The Fed took this emergency measure after Bear Stearns' liquidity nearly evaporated in March. The action was intended to stop financial markets from seizing up amid panic over huge subprime mortgage market losses, which has subsequently prompted calls to modernize the laws governing U.S. financial services.

The U.S. Treasury has published a hefty plan on how to go about overhauling the country's regulatory framework, including a suggestion to turn the Fed into a financial market stability policeman. It also discussed consolidating the number of regulators, which would mean the Fed surrendering some of its supervision duties of state and local banks.

The Fed has called the plan a good first step, in a diplomatic nod to the lengthy negotiations that lie ahead for any new banking rules. Lawmakers are also focused on the presidential and congressional elections in November and it is unlikely that any changes will be made before next year.

Fed insiders say they cannot monitor market stability without oversight of investment banks, which are currently regulated by the SEC. Shelby saw things differently.

"Now they (Fed) are going to have oversight. The SEC is going to have closer oversight," he said. "We on the banking committees in the House and the Senate have got to do it because we do have a financial crisis." (Reporting by Rachelle Younglai and Alister Bull; Editing by Leslie Adler)