Fed should quit consumer protection - Mishkin

WASHINGTON, July 7 (Reuters) - The U.S. Federal Reserve should relinquish its consumer protection powers in order to do a better job of combating systemic risk, a former Fed policy-maker told Congress in testimony released on Tuesday.

Frederic Mishkin, who stepped down as a Fed Board governor in August, said the demands of a consumer protection regulator were fundamentally different to those of systemic regulation, and also exposed the Fed to unwelcome political pressure.

"If the Federal Reserve is asked to be a systemic regulator it should relinquish its role as a consumer protection regulator," he said in testimony to the House subcommittee on domestic monetary policy, due to be delivered on Thursday. A copy of his remarks was made available in advance.

"Political pressure on a systemic regulator because politicians are unhappy with its role as a consumer regulator may interfere with the regulator's independence,' he said.

The White House, in a major shakeup of U.S. financial regulation following a financial crisis last year, wants to make the Fed the systemic regulator while handing its consumer protection powers to a new consumer protection agency.

But the creation of a new federal agency is opposed by the financial services industry, as well as regulators, including the Fed, who do not want to give up these powers.

The Fed has been criticized by politicians and consumer advocates for not defending consumers from predatory lending. They say this played a role in the collapse of the subprime mortgage sector at the root of last year's market meltdown.

But much of this perceived reluctance to regulate has been blamed on former Fed Chairman Alan Greenspan, who retired in 2006 and was replaced by Ben Bernanke.

Bernanke told Congress last month that it may have been slow to invoke its consumer protection powers, but it has become much more aggressive in the last couple of years.

Thursday's hearings will examine the issue of balancing Fed monetary policy independence with systemic risk regulation and will include testimony by Fed Vice Chairman Donald Kohn, as well as comments from other experts.

Former Fed governor Laurence Meyer, in testimony also prepared for the hearing and released on Tuesday, said he did not believe that making the Fed a systemic risk regulator would conflict with its independent monetary policy authority.

He said the Fed already was supervisor for bank holding companies, and nearly all the systemically important financial institutions still in existence already fall into this category . All five major U.S. investment banks have either failed, been acquired or merged into bank holding companies, or taken out charters to become holding companies, Meyer noted.

As a result of this, Treasury's proposal, if approved, would not bestow such vast new authority on the Fed that it would become a "super-regulator" as some in Congress fear.

"The bottom line is that the Fed is the best choice for consolidated supervision of systemically important financial institutions in its current role, as well as in any expanded role under the Treasury proposal," Meyer said. (Reporting by Alister Bull and Glenn Somerville)