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WASHINGTON, May 5 (Reuters) - A push to keep the U.S. Federal Reserve in the business of supervising smaller banks, a power it could lose in a congressional overhaul of financial regulation, gained an influential backer on Wednesday amid lobbying by top officials of the central bank.
Senator Patty Murray, a member of Democratic leadership, has become a co-sponsor of an amendment to financial regulatory reform that would leave the Fed in charge of supervising thousands of smaller financial firms, said one of the measure's lead sponsors, Senator Kay Bailey Hutchison.
The measure is one of dozens of proposed additions to financial overhaul legislation that the Senate is debating. It is unclear whether the provision will even be considered, let alone adopted, but backing from a senior Democrat improves its chances.
The presidents of five regional Fed banks were on Capitol Hill on Wednesday to urge lawmakers not to strip the U.S. central bank of its authority over smaller institutions, lawmakers said.
The Fed came under blistering criticism from some members of Congress over regulatory lapses after a paralyzing financial crisis tipped the U.S. economy into the worst recession in decades. The legislation the Senate is debating would leave the Fed in charge of policing about 50 of the largest U.S. financial firms, but would hand oversight of smaller institutions to other regulators.
Fed officials don't want to give up those powers, arguing that loss of responsibility over banks across the country would deprive them of an important insight into how the economy is working.
"Stripping the Fed of its supervisory authority will drastically reduce the Fed's ability to achieve its objective of maintaining sound monetary policy," said Hutchison, a Texas Republican who serves on the banking committee.
Under the Senate proposal, some regional Fed banks would go from supervising hundreds of institutions to overseeing none or only one or two.
President Barack Obama is pushing for regulatory reform to prevent a recurrence of the 2008-09 financial crisis. Similar efforts are under way in the European Union.
The U.S. House of Representatives approved a reform bill in December. Whatever the Senate passes would have to be merged with the House bill to produce final legislation. (Reporting by Mark Felsenthal; Editing by Leslie Adler)