Federal Reserve Chairman Ben Bernanke on Wednesday defended the central bank's supervision of smaller banks, which it would lose in regulatory reform proposals, in a hearing before a congressional panel.

Bernanke, in testimony prepared for delivery to the House of Representatives Financial Services Committee, argued against a piece of the Senate regulatory overhaul bill that would shift supervision of thousands of bank holding companies with assets under $50 billion and state-chartered banks to other regulators.

The insights provided by our role in supervising a range of banks, including community banks, significantly increase our effectiveness in making monetary policy and fostering financial stability, he said.

Senator Christopher Dodd unveiled revised legislation on Monday that would give the Fed more power than in his earlier proposals, putting the central bank in charge of overseeing banks and important financial firms with assets greater than $50 billion.

However, the measure would pull the Fed out of supervision of more than 5,000 smaller banking firms, handing that responsibility to the Federal Deposit Insurance Corp and the Office of the Comptroller of the Currency.

Former Fed Chairman Paul Volcker, who will appear along with Bernanke at Wednesday's hearing, will also take up the Fed's case to oversee smaller banks, a report in the Wall Street Journal said.

The Fed's regional roots would be weaker and a useful source of information lost, the paper quoted Volcker's prepared remarks.

(Editing by Padraic Cassidy)