WASHINGTON Senators leaning toward preserving the Federal Reserve's role as a bank supervisor and consumer protection regulator came under criticism on Monday from academics and consumer activists.
"Allowing the Fed to retain policing authority over the country's 23 largest banks ... and including responsibility for a new consumer protection agency is a bad idea," said Mark Williams, a lecturer at Boston University's management school.
"Irresponsible Fed actions supplied gasoline that ignited the financial crisis," he said. "Instead of rewarding the Fed for a job poorly done, Washington policy-makers should not reward unacceptable regulatory behavior."
The Fed could retain oversight of large bank holding companies under a scaled-back regulatory reform plan being considered in the Senate Banking Committee, lobbyists said.
In a retreat from a bold proposal to streamline a patchwork bank regulatory system, lawmakers were considering keeping supervision of companies such as Citigroup and Bank of America at the Fed, as Reuters reported in February.
It was still unclear, lobbyists said, if the Fed under the evolving plan would be an "umbrella supervisor," continuing to rely on other agencies for detailed bank exams, and how many companies might be put under the Fed.
One option, they said, was to assign holding companies with assets of $100 billion and up to the Fed, which would include nearly two dozen major firms.
Other, more expansive options were also being considered, with Senate Banking Committee Chairman Christopher Dodd expected to unveil legislation as soon as this week after months of negotiations with fellow Democrats and Republicans.
Regulatory reform is a top domestic priority of President Barack Obama, who wants to crack down on banks and capital markets following the worst financial crisis in decades.
In November, Dodd called the Fed's past performance as a banking supervisor and consumer protection watchdog an "abysmal failure." When he made that remark, he proposed consolidating bank supervision into a super-cop for the industry to be called the Financial Institutions Regulatory Administration, or FIRA.
But the FIRA proposal has unraveled as Dodd has discussed a range of compromises with Republicans and moved closer to embracing regulatory reforms watered down from a sweeping bill approved in December by the U.S. House of Representatives.
The FIRA would have streamlined the bank oversight duties of the Fed, the Comptroller of the Currency, the Federal Deposit Insurance Corp and other agencies.
Another potential Senate compromise is to put a proposed financial consumer watchdog office inside the Fed.
"We do not believe banking regulators, or any committee or group of those regulators, should be given any authority to veto or delay important consumer protections," said Pam Banks, senior counsel at Consumers Union, the non-profit publisher of Consumer Reports magazine.
"Inaction and delay by banking regulators is what allowed the subprime crisis to fester in the first place, threatening the near collapse of our economy," Banks said.
In recent weeks, the Fed has pushed hard to preserve its role as a bank supervisor. Senators are discussing doing that up to a point, stripping the Fed of its job as supervisor of a large number of state-chartered banks.
Dodd was said to be leaning toward reassigning those banks to the FDIC, which already examines many other state-chartered banks not in the Fed system, lobbyists said,
Dodd also plans to call for closing the Office of Thrift Supervision, which regulates thrift institutions.
On Friday, Dodd said he was uncertain whether bipartisan support for a compromise reform bill could be achieved.
(Reporting by Kevin Drawbaugh; Additional reporting by Rachelle Younglai; Editing by Jan Paschal)