Fed may get new powers in overhaul

Senate negotiators are considering giving the Fed the authority to supervise nonbank financial institutions that are so large and intertwined that their failure could pose a risk to the entire economy, according to people familiar with the legislation.

The Fed also would retain its power to oversee nearly two dozen bank holding companies that hold about two-thirds of the banking system’s assets, according to these people, who spoke on condition of anonymity because of the sensitivity of the discussions.

That would make the Fed the main entity responsible for avoiding a future financial meltdown like the one that struck Wall Street in fall 2008.

For the once-embattled central bank, the Senate negotiations represent a remarkable change of fortune.

In November, Senate Banking Committee chairman Christopher Dodd wanted the Fed stripped of its supervisory powers so it could focus on its job setting monetary policy and modulating the economy.

And in January, Fed chairman Ben Bernanke survived a grueling Senate confirmation for a second term.

Since then, Bernanke and Treasury Secretary Timothy Geithner have been making a case to Dodd and his main Republican negotiating partner, Senator Bob Corker of Tennessee, to let the Fed retain certain supervisory powers.

“There’s an appreciation that the Fed — Bernanke particularly — handled the situation over the last year in a very difficult environment, handled it well,’’ Dodd said.

With its power to turn the dial on interest rates, the Federal Reserve has unmatched muscle to control economic growth, employment, and inflation. It also is the country’s lender of last resort when banks can’t get their money elsewhere — a formidable tool that the Fed exercised fully at the height of the financial crisis.

The people familiar with the evolving legislation say the Fed would continue to supervise bank holding companies with assets of $100 billion or more, while losing its power over thousands of smaller bank holding companies and hundreds of state-chartered banks.

More significantly, it would gain oversight of the nonbank firms that regulators identify as having the most potential to threaten the financial system’s stability in the future.

In addition, Dodd and Corker are considering making the Fed the home for a consumer financial protection entity that would write regulations on products such as mortgages and credit cards.