FACTBOX-Keys to U.S. Senate compromise on financial reform

Feb 27 (Reuters) - A revised bill on financial regulatory reform is expected to be unveiled next week in the U.S. Senate by Democratic Banking Committee Chairman Christopher Dodd.

The bill will be the next step in a long drive by the Obama administration and congressional Democrats to tighten bank and capital market oversight after the worst financial crisis in decades tipped the U.S. economy into a deep recession.

The Dodd bill will likely be scaled back from a sweeping regulatory reform measure approved in December by the House of Representatives, which itself was pared back in some respects from reforms proposed by President Barack Obama in mid-2009.

Below is a look at some of the probable contours of the Dodd legislation and their political prospects, based on discussions with lawmakers, congressional aides and lobbyists:

* CONSUMER PROTECTION

Tackling the biggest obstacle to bipartisan support for reforms, Dodd may call for creating a financial consumer protection watchdog as a division inside an existing regulator, rather than an independent agency.

Obama last year proposed an independent U.S. Consumer Financial Protection Agency (CFPA) to regulate mortgages, credit cards and other financial products. The White House still favors that approach. The House has endorsed it.

But Republicans have refused to consider an independent agency, saying it would unwisely divorce consumer protection and banking regulation. They also oppose Dodd's latest approach to rule-writing power for a consumer division inside another regulator, but perhaps not the idea of a division itself.

Lobbyists for banks and Wall Street firms, whose profits would be threatened by the CFPA, months ago made stopping it their top goal in a broad push to weaken reforms.

* BANK SUPERVISION

Dodd is expected to call for a modest streamlining of the nation's patchwork system for supervising banks, a significant step back from a bold proposal he made in November to consolidate into a single, new agency the bank supervision authorities now housed in several agencies.

The Federal Reserve may keep oversight of large bank holding companies, such as Citigroup and Bank of America, but surrender its responsibility for some state-chartered banks to the Federal Deposit Insurance Corp, which already oversees other state-chartered banks.

The Office of Thrift Supervision (OTS), which polices thrift institutions, is likely to be closed, with its operations merged into the Office of the Comptroller of the Currency (OCC), which now regulates national banks. The OCC may remain in its present place as a Treasury Department unit.

The House bill approved in December called for closing the OTS and merging it into the OCC, but preserving the Fed's and the FDIC's traditional bank supervision roles.

* VOLCKER RULE

Dodd will probably add to his bill a part of the House bill that empowered regulators to order large firms that are in distress to halt or divest risky businesses.

That would include proprietary trading desks, as well as hedge fund and private equity interests, like those targeted by the "Volcker rule" proposed by Obama in January.

The rule, named after White House economic adviser Paul Volcker, sought a ban on banks' "prop trading" and hedge fund ventures. Dodd is likely to be less proscriptive, leaving such decisions up to the discretion of regulators.

The administration has voiced continued support for the Volcker rule as proposed by the president.

* EXECUTIVE PAY AND SHAREHOLDER RIGHTS

Two senators assigned by Dodd to work out a bipartisan compromise on these issues have failed to do so.

Democratic Senator Charles Schumer and Republican Senator Mike Crapo are in a deadlock. The details of their disagreement are unclear. It threatens proposals that would give shareholders more say on executive pay, more clout in electing directors and more compensation committee independence.

* SYSTEMIC RISK REGULATION

Most Democrats and Republicans agree on the need for a new regulator to monitor the financial landscape and spot threats to stability before they worsen and cause the next crisis.

The idea of a council of agency heads to do this has wide support, despite reservations within the administration, which proposed last year that the Fed take on the job.

The House bill proposed an inter-agency council chaired by the Treasury, with the Fed as its chief policy agent.

Dodd will likely also recommend a systemic risk council chaired by the Treasury Secretary, with the head of the Fed as vice-chair. Disputes remain over the council's powers.

* RESOLUTION FUND

To deal with financial firms seen as "too big to fail," Dodd will likely propose a new government process for shutting down large, troubled firms.

Blending proposals from both Democrats and Republicans, Dodd will probably propose allowing the government to seize distressed firms and unwind them in a bankruptcy-like process, probably with help from temporary government loans if needed. (For a FACTBOX on key players reshaping U.S. financial rules, click on [ID:nN17146028]) (For a recent story on the financial reform push in the Senate, click on [ID:nN27197196] (Reporting by Kevin Drawbaugh, Rachelle Younglai, Caren Bohan, David Lawder, Glenn Somerville and Karey Wutkowski; editing by Todd Eastham )