Lawmakers, especially Democrats, have criticized the Federal Reserve of using its existing powers too little as a regulator to rein in some of the financial excesses that contributed to the economic meltdown.

So in the spirit of use-it-or-lose-it, Sen. Chris Dodd, chairman of the Senate Banking, Housing and Urban Affairs Committee, and other Democrats on his panel introduced legislation Tuesday that would strip the Fed of some of its regulatory powers.

In his statement, Dodd said:

"We will end "too big to fail." We cannot allow the collapse of a few firms to threaten our entire economy. Our plan will create an independent council of regulators to identify risks, so that government can act to prevent a crisis. We will have a mechanism in place to safely shut down large failing companies without destabilizing the financial system. No longer will the Federal Reserve's emergency lending authority be used to prop up a failed institution."

"Our proposal will replace the myriad government agencies that failed to rein in risky schemes with a single, accountable federal banking regulator. We will do this while preserving the dual banking system with a separate division for community banks that have never posed, and do not now pose, the same risks as these huge financial institutions. For firms that play by the rules, this single prudential regulator will provide clarity, cut red tape, and make it easier to compete. But those institutions that would undermine the security of our economy will no longer be able to shop for the weakest regulator."

(Here's a document that provides highlights of the legislative discussion draft.)

 

The proposal by Dodd and his fellow panel Democrats would create a Consumer Financial Protection Agency. The financial services industry has generally opposed this idea.

The Democrats' plan would also create a new Financial Institutions Regulatory Administration that would put in one place regulatory powers now spread across several agencies including the Federal Deposit Insurance Corp and the Federal Reserve.

Those agencies have resisted this idea of a super agency overseeing the banking system. They've warned that it would be easier for the industry to influence regulators at one large agency than regulators at several agencies, so-called "regulatory capture."

And like institutions in not just the public sector but the private sector too, they also jealously guard their turf and are reluctant to give up any of their duties since that would mean reduced budgets and authority.

Thus Dodd's plan is likely to face fierce lobbying against it and not just from the financial-services industry but federal agencies as well.