REFILE-UPDATE 2-U.S. seeks enhanced financial authority for Fed

(Refiles to fix typo in par 12)

By John Poirier and Glenn Somerville

WASHINGTON, March 28 (Reuters) - The U.S. Treasury Department will propose on Monday that the Federal Reserve be given sweeping new powers that would make it chief regulator with authority to require actions to ensure market stability.

An executive summary of the proposals published by the New York Times, which Treasury Secretary Henry Paulson will make public on Monday when he unveils a blueprint for regulatory overhaul, says it is vital to fix "regulatory gaps and redundancies" exposed by an ongoing subprime mortgage crisis.

Lax regulation has been widely blamed for permitting a flood of inadequately documented loans to be made during the boom years of a U.S. housing market that has since soured and now threatens to drag the economy into a deep recession.

The proposals say a "market stability regulator" is needed and the Fed best fits that role, suggesting the central bank could use its control over interest rates as well as its ability to provide market liquidity to fulfil its functions.

It proposes that the Fed be given broad authority to require information from all participants in financial markets and a right to collaborate with other regulators in writing the rules that companies and institutions must follow. For a factbox on the proposed overhaul, click on [ID:SP266640]

NEW FED POWERS

If the Fed finds that the actions of some market participants pose risks for the overall financial system or the economy, "the Federal Reserve should have authority to require corrective action to address current risks or to constrain future risk-taking," the summary said.