UPDATE 2-Senate OKs measure calling on Fed to name firms

(Adds details, background)

By Mark Felsenthal

WASHINGTON, April 2 (Reuters) - In an unusual political challenge to the Federal Reserve, the Senate on Thursday approved a provision calling upon the central bank to disclose the names of institutions that receive emergency loans.

The Senate attached the measure as an amendment to a budget blueprint for fiscal 2010 on a vote of 59 to 39.

The budget resolution is non-binding and would not have the force of law. But by seeking to reverse a key aspect of the Fed's lender-of-last resort function -- letting borrowers at its discount window remain anonymous -- the vote highlights an erosion of support for the Fed in the Senate.

"Fifty-nine senators believe the discount window should be made public, which is a rejection of a fundamental way the Fed operates -- it shows the Fed has no support in the Senate for one of its core principles," said a Senate aide who spoke on condition of anonymity.

The U.S. central bank acts as a lender-of-last-resort to banks and has extended those privileges to other financial institutions since the financial crisis deepened. The Fed says it does not name recipients of loans because public knowledge that an institution cannot obtain funds in the open market could provoke a run on that firm.

A Fed spokesperson said on Thursday the central bank has to be mindful of the stability of financial markets.

"We have already begun disclosing more information about collateral pledged at Federal Reserve liquidity facilities and the review is continuing across a variety of possible types of additional information," the spokesperson said.

The amendment approved by the Senate calls on the Fed to identify each firm it has given assistance to, how much the assistance was worth, and what the firm is doing with the money.

It was sponsored Senators Bernie Sanders, Russ Feingold, Jim Webb and Jim Bunning. Sanders is a Vermont independent who usually aligns with Democrats, while Feingold and Webb are both Democrats, and Bunning is a Republican.

"The American people have a right to know who the Fed is lending taxpayer dollars to, how much they are getting and what the Fed is asking in return for this money," Sanders said in a statement.

The Senate's action comes as lawmakers begin to consider an overhaul of U.S. financial oversight.

The Obama administration has proposed the creation of a "systemic-risk regulator" to oversee threats to the entire financial system, and some lawmakers have seen the Fed filling that role. The Senate's lop-sided vote suggests lawmakers might hesitate in giving the central bank greater authority.

The Senate also approved an amendment by Senate Banking Committee Chairman Christopher Dodd and the panel's top Republican, Senator Richard Shelby, that calls on the Fed to provide more information about collateral that has been posted against loans and on losses incurred as a result of the bailouts of Bear Stearns and American International Group.

The budget resolution is expected to clear the Senate on Thursday, but will need to reconciled with a separate House version. Whether either Senate amendment will survive that process is unclear. (Editing by Leslie Adler)