Treasury not swayed by U.S. bank regulators: Wolin

WASHINGTON (Reuters) - The U.S. Treasury Department will not yield on its proposal to strip financial regulators of their consumer protection role, rejecting pleas from agency heads who would be forced to hand those powers to a new federal agency, a top Treasury official told Reuters on Thursday.

At a Congressional hearing earlier this week, regulators beseeched lawmakers to dial back some of the proposed reforms, but Treasury officials say they must tighten financial oversight in the wake of the global financial crisis.

Treasury is determined, for example, to create a new regulator to keep dangerous financial products away from vulnerable consumers, arguing it is needed because regulators' current scattered approach was seen as ineffective.

"We need consumer protection that is not subordinated to safety and soundness concerns, but that goes alongside safety and soundness regulators," Deputy Treasury Secretary Neal Wolin said in an interview with Reuters on Thursday.

"We've laid out what we think are the most important elements of the consumer protection piece and we're working with the Hill to move that forward," he said.

Treasury officials are prepared to haggle over some fine points of a regulatory reform plan but cite three key elements that they say must be in the final legislation.

Systemic risk, consumer protection and financial modernization must survive intact when the legislation is finalized later this year, officials expect.

Treasury officials discuss regulatory reform on a daily basis with the country's independent bank regulators, congressional staff and financial services stakeholders, Wolin said, adding they all see eye to eye on key issues.

"On systemic risk, I think people have agreed that there should be a council of regulators that has important functions," he told Reuters. "I think people agree that there needs to be an institution that focuses on the supervision of the biggest, most interconnected firms."

REGULATORS STAND THEIR GROUND

Treasury officials and regulators, however, disagree on the issue of a need for a single-minded, consumer protection agency.

The Treasury Department wants a proposed Consumer Financial Protection Agency to have broad powers to write and enforce rules on financial products like credit cards and mortgages.

Wolin said Treasury was open to negotiation on many parts of its sweeping proposal to overhaul financial regulation, but some pieces -- including a consumer agency with the power to enforce the rules it writes -- were too critical to meddle with.

The proposed agency has been derided by financial firms who do not want the extra regulatory presence as well as by regulators who do not want to lose the ability to examine firms for compliance with consumer protection rules.

Officials from the Federal Reserve, Federal Deposit Insurance Corp and Office of the Comptroller of the Currency continue to plead their case to lawmakers, despite a dressing down from Treasury Secretary Timothy Geithner late last week.

Geithner called agency heads into a meeting last Friday and warned that their turf concerns and public criticisms could hamper the greater cause of getting legislation in place that safeguards against future crises.

Nonetheless, only days later on Tuesday, regulators once again told a Senate Banking Committee that it would be imprudent to separate the regulation of an institution from the regulation of its products and services.

FDIC Chairman Sheila Bair argued that a new consumer agency should provide a "baseline" of protection for all financial firms but that examination and enforcement should stay with bank regulators.

OCC chief John Dugan said "bank examiners are good at implementing rules that are written" while a letter obtained by Reuters on Wednesday has Fed Chairman Ben Bernanke arguing that "prudential supervision and consumer compliance supervision are complementary and should not be separated."

Wolin, however, said that will simply leave the opportunity for firms to shop around for the most relaxed enforcement.

"Our view is that as long as you have rule making separate from supervision and enforcement, or as long as you have multiple agencies in sort of a balkanized fashion all dealing with consumer protection, you're not going to have a truly level playing field."