The Federal Reserve would gain new powers over non-bank financial firms and keep much of its authority over banks under a new bill on financial regulatory reform unveiled on Monday by the chairman of the Senate Banking Committee, Christopher Dodd.
In a turnaround for the central bank after months of public criticism, Dodd, a Democrat, proposed creating a new financial consumer watchdog, with examination and enforcement powers, that would be a unit of the Fed.
The consumer watchdog, first proposed by President Barack Obama as an independent agency, would have the power to write rules and to enforce consumer protection rules at banks with assets over $10 billion, mortgage-related businesses and some large nonbank financial firms, such as insurers.
Dodd's new proposal comes after efforts at a bipartisan compromise broke down earlier this month. Dodd had been working to find compromises since Republicans immediately rejected his initial draft bill in November.
Senator Richard Shelby, the top Republican on the Senate Banking Committee, said in an interview with CNBC on Monday before the bill was unveiled that Dodd will need "a lot of Republican help" to get financial reform approved in the Senate.
Any bill that emerges from Dodd's committee would need 60 votes in the Senate to overcome procedural roadblocks that are sure to be thrown up by Republicans; the Democrats control only 59 seats.
Dodd's new legislative proposal would create a new framework for dealing with big firms that could threaten the stability of the financial system if they became troubled.
The threat from firms seen as too-big-to-fail was thrown into the spotlight during the height of the financial crisis, when the federal government pumped hundreds of billions of dollars into firms such as insurer AIG to save them from collapse.
Dodd's bill would create a systemic risk council and allow the Fed, with the council's approval, to order the break-up of large financial firms judged to pose a threat to the stability of the financial system.
The bill also contains a version of what has been dubbed the "Volcker rule" that would require regulators to establish rules to prohibit proprietary trading at banks, and bank sponsorship of hedge funds and private equity funds.
The original rule proposed by President Barack Obama was named after Paul Volcker, the White House economics adviser and former Fed chairman who inspired it.
Dodd said the Congress needs to move quickly on financial reform, with only about 60 legislative days to go before lawmakers shift their focus to the November election campaigns.
"We don't have many days left to get this job done. So there is a sense of urgency. ... We do need to act," Dodd said.
Dodd's panel will debate the bill next week.
Under his bill, the Fed would supervise bank holding companies with assets exceeding $50 billion.
These plans could yet change, sources said, with weeks to go before Congress completes its long debate on regulatory reform after the worst U.S. financial crisis in generations tipped the economy into recession and shook markets worldwide.
With Republicans and bank lobbyists working to weaken and block new rules, the push for reform could fail in the Senate.
Shelby, in the CNBC interview, said that regulating the over-the-counter derivatives market and corporate governance remain key sticking points, but said there is consensus on up to 90 percent of the issues.
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