Senators working on financial regulatory reform say important areas of the Obama administration’s agenda are under threat – even as the president adds to the complexity with new proposals to outlaw most proprietary trading and limit the size of banks.

The Consumer Financial Protection Agency, one of Mr Obama’s most cherished innovations, is known to be most vulnerable in negotiations on the Senate banking committee.

But senators and their aides also say that the prevailing mood is to strip the Federal Reserve of its bank supervision role in the face of stark warnings about the effect on financial stability and monetary policy from Tim Geithner, Treasury secretary, and Ben Bernanke, Fed chairman.

“To me they have not yet made a compelling case that they have to be primary supervisor in order to conduct monetary policy,” said Jack Reed, the Democratic senator from Rhode Island. “Independence of monetary policy has to be protected but if you’re a regulatory [authority] you’re essentially enforcing the laws that we pass.”

Like Sheila Bair, chair of the Federal Deposit Insurance Corporation, he blamed the Fed for not taking tougher pre-emptive action against subprime mortgage selling.

Asked if the Fed should keep its bank supervision role, Judd Gregg, the New Hampshire Republican, said: “I think they should – I agree with the White House on this.”

He added: “That is not however the majority position. I think on the banking committee in the Senate, [neither] my position nor the White House position nor Treasury position is the majority position. There’s a real sentiment by the leadership of the committee, specifically Senator [Christopher] Dodd and Senator [Richard] Shelby, that the Fed should be limited in its role of supervision.”

Other elements of proposed reform, including giving the Securities and Exchange Commission the power to fund itself through industry fees and giving shareholders “proxy access” to nominate directors, have met a Republican roadblock.

“We’re not making much progress but we’re continuing to negotiate,” said an aide to Charles Schumer, the Democratic senator from New York, who
is responsible for the
corporate governance re-forms included in the first draft Senate bill and is struggling in talks with Mike Crapo, his Republican counterpart.

Other negotiations are going better. Mark Warner, the Democrat from Virginia, and Bob Corker, the Republican from Tennessee, are close to agreement on how to set up a resolution authority for failing financial groups.

Mr Reed and Mr Gregg said they were making progress on derivatives, with reforms that would push most over-the-counter trading through clearing houses, but not necessarily on to electronic exchanges.

But those rays of light are overshadowed by the latest White House directives on bank taxes and new limits on Wall Street.

The latter will have to be worked into the Senate bill and although an administration official on Friday said that could be done quickly, as the plan was only an evolution from earlier proposals, Republicans have demanded more time.

Few Democrats at the forefront of the reform effort have reacted with enthusiasm to the new initiatives.

Mr Gregg said: “So far, I think the White House proposals generally on financial restructuring – with the exception of the separate consumer agency – have been very responsible and constructive so they have a lot of credibility with me generally on these issues.”

But he added that there was a dangerous tone to proposals that hurt banks and could have a negative effect on credit provision and job creation.

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