UPDATE 1-US Rep. Frank says thrift charter should remain

WASHINGTON, July 15 (Reuters) - A key Congressional committee will not move to abolish the federal thrift charter, despite the Obama administration's proposal to do so, the chairman of the House Financial Services Committee said on Wednesday.

"We think there is a very important thrift function that has to be preserved," said Barney Frank, during a hearing about the financial industry's reaction to regulatory reform proposals.

The Obama administration proposed last month to abolish the charter and force existing thrifts to convert to banks. It argued that the thrift charter is no longer as relevant and has allowed financial institutions to shop for lighter regulation.

Thrifts, which must keep about two-thirds of their assets in mortgages or mortgage-related securities, have been among some of the largest financial institution failures during the crisis. Two prime examples are Washington Mutual and IndyMac Bank.

Ed Yingling, chief executive of the American Bankers Association, told lawmakers on Wednesday that the thrift charter is based upon a housing expertise that permits regulated housing lenders to make safe and sound loans, and that it should remain.

Frank, however, acknowledged that the thrift charter has been abused and said it should be modified.

"There has been a problem with the thrift charter in that it is both a charter to engage in thrift activity and to some extent a hunting license to go and do other things with less regulation," he said. "I believe we are capable of ... rewriting that so it is a thrift charter and a thrift charter only."

The removal of the thrift charter is just one component of a sweeping reform proposal put forth by the Obama administration. President Barack Obama has also called for an overhaul of compensation practices by financial firms, more oversight of derivatives markets and the creation of a new consumer financial protection agency that would have broad powers to write and enforce rules on mortgage products, credit cards and other products.

Financial industry representatives told lawmakers on Wednesday that such a powerful new agency would be an unnecessary layer of regulation that would drive up costs for consumers, reduce access to credit and stifle innovation.

"We recommend that stronger, more explicit consumer protections be provided to regulators to close the regulatory gaps and provide for uniform national standards," said Steve Bartlett, chief executive of the Financial Services Roundtable.

The new agency, as proposed by the administration and in legislation introduced by Frank, would strip the consumer protection roles from existing bank regulators.

The Federal Reserve and other bank regulators have opposed such a move, saying that it makes little sense to separate the regulation of an institution from the regulation of its products and services.

The industry representatives also said they are concerned that financial firms could be pulled in different directions by their primary regulator and the new agency.

Frank, however, said legislation to create a consumer agency would not result in conflicting regulations.

"I certainly agree it should not be a situation in which any bank could ever be given contradictory orders," he said. (Reporting by Karey Wutkowski, editing by Gerald E. McCormick)