Senate financial reform plan would slash Fed role

By Mark Felsenthal

WASHINGTON (Reuters) - The U.S. Federal Reserve's powers would be sharply curtailed and politics would creep deeper into the central bank system under a proposal unveiled by the head of the Senate Banking Committee on Tuesday.

In a far-reaching plan aimed at correcting flaws in financial regulation after the worst banking crisis since the 1930s, Senator Christopher Dodd proposed consolidating bank supervisory powers in a single agency, stripping the Fed of its role as a direct bank supervisor.

The plan would also give the president the power to name chairmen for each of the 12 regional Fed bank boards, taking away a prerogative banks now enjoy.

Dodd's bill would also require the Fed to name within a year any firms taking emergency loans from the central bank.

"If you believe that it's critical that the central bank have a bird's eye view of the inner workings of the banking system, then you're not going to be happy with the Dodd bill," said Brian Gardner, a Washington analyst for Keefe, Bruyette & Woods in New York.

Dodd, who is embroiled in a tough re-election campaign, was unapologetic, calling the Fed's regulatory performance in the run-up to the crisis an "abysmal failure." He said his bill lets the central bank focus on its core function of ensuring stable prices with full employment.

His position reflects broader frustration in the Senate with the Fed's track record as an oversight agency.

INDEPENDENCE ISSUES

Any final version of financial system reform must be approved by both the House and Senate, and whatever emerges may look very different from Dodd's plan.

The Obama administration had proposed giving the Fed expanded powers over systemically important firms, while a bill under consideration in the House of Representatives calls for the Fed to participate in a council of regulators who would monitor broad financial instability. The central bank retains its supervisory authority in both of those versions.

But by substantially ratcheting back the Fed's role and chipping away at its political independence, Dodd's proposal tugs the center of the debate toward those who believe that part of the blame for the crisis lies in the Fed's failure to use its authority to crack down on the risky lending practices at the heart of the credit crisis.

The Fed said it was still reviewing the document and would evaluate it in light of how it would affect its ability to promote growth and ensure price stability.

"Three key principles will guide our considerations, namely preserving our ability to effectively carry out the nation's monetary policy; strengthening our ability to promote financial stability and maintaining the crucial independence of the work of the central bank," a Fed spokeswoman said.

Dodd's proposal would also give Washington greater say in the way the regional Fed boards are selected, eliminating the role the private sector now plays.

Not only would the chairmen be appointed by the president, subject to the Senate's approval, but the Fed's Washington-based Board of Governors -- a group of presidential appointees -- would name the rest.