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.

Among other recommendations, Treasury suggests merging the Securities and Exchange Commission, the U.S. markets watchdog, with the Commodity Futures Trading Commission that oversees the activities of the futures market.

It also recommends getting rid of a Depression-era charter for thrifts that was intended to make it easier to obtain mortgage loans, saying it is no longer necessary. That would mean closing up the Office of Thrift Supervision and transferring its duties to the Office of the Comptroller of the Currency that oversees national banks.

It urges setting up a "Mortgage Origination Commission" made up of regulatory agency representatives that would be able to set licensing standards for mortgage brokers.

Brokers were blamed for steering many Americans into mortgage loans that carried low initial "teaser" rates that lasted only a few years before resetting at higher levels with consequently costlier monthly payments.

New York Democratic Sen. Charles Schumer, who chairs the congressional Joint Economic Committee, said in a statement on Friday night that Paulson was "on the money when he calls for a more unified regulatory structure".

Fed Chairman Ben Bernanke is scheduled to testify next Wednesday about the economy's condition and will face questioning about the U.S. central bank's willingness to step up as a super-regulator.

Treasury said it has been working on its proposals since March last year, well before calls for an overhaul began to intensify in the wake of the subprime mortgage crisis that began to wreak havoc last summer on financial markets.