Disagreement within the Obama administration over reshaping U.S. financial regulation flared on Tuesday, with top bank regulators defending their turf against key parts of a broad bank supervision overhaul plan.
The officials' defiance, voiced before the Senate Banking Committee, came despite a stern warning from Treasury Secretary Timothy Geithner on Friday about the need for administration officials to line up behind White House priorities.
In expletive-laced remarks at a private meeting, Geithner urged regulators to end turf battles and support President Barack Obama's plan, said a person familiar with the matter.
But that seemed to make little impact on the regulators, who took issue with administration proposals for consolidating bank supervision and taking other steps to tighten oversight of banks and markets amid the worst financial crisis in decades.
With the economy in deep recession, the Obama plan is aimed at updating a system largely set up in the 1930s and simplifying a structure which has duties spread across many agencies. But the reforms have met widespread resistance.
Some might argue there's a bit of turf protection here. That's natural, said Democratic Senator Charles Schumer.
Both Schumer and Senate banking committee chairman Christopher Dodd said Congress and the administration must look at the big picture.
Our job here is not to protect regulators, Dodd said.
But Senator Richard Shelby, the committee's top Republican, said he hoped the regulators would not be swayed by Geithner's tirade ... Your honesty and your candor are very important.
The Obama plan calls for creating a national bank supervisor by merging the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS).
SOME LAWMAKERS EYE STATES
It leaves state bank supervision to the Federal Deposit Insurance Corp (FDIC) and the Federal Reserve, although some lawmakers are discussing changes in this area, as well.
Do we really need three federal agencies to regulate banks? asked Dodd, for instance.
Schumer said he sees potential benefits from a single, consolidated bank regulator.
The White House plan would also create a Consumer Financial Protection Agency (CFPA) and give the Fed the job of monitoring systemic risk in the economy, both major regulatory changes.
But John Bowman, acting director of the OTS, refused to support the Obama administration's proposal.
We do not support the administration's proposal to establish a new agency, the National Bank Supervisor (NBS), by eliminating the Office of the Comptroller of the Currency ... and the OTS, Bowman said.
He added, The OTS does not support the provision in the administration's proposal to eliminate the thrift charter.
Such comments marked a stiffening of regulators' opposition to portions of Obama's plan, which still must undergo many more months of debate in Congress.
FDIC Chairman Sheila Bair said her agency supports a merger of OCC and OTS, but resisted more centralization of bank oversight.
There is a profound risk of regulatory capture if you collapse it all into one agency, Bair said. We think having multiple voices can actually strengthen regulation.
John Dugan, comptroller of the currency, warned lawmakers the existing plan would wrongly give the Fed the right to 'override' the views of other regulators when it came to supervising very large banks.
Such a move would undermine the authority -- and the accountability -- of the banking supervisor he said.
Dugan said his office supports merging OTS and OCC.
TARULLO DEFENDS FED POWERS
Federal Reserve Board Governor Daniel Tarullo argued for preserving the Fed's bank oversight powers, with enhancements.
It is essential both to refocus the regulation and supervision of banking institutions under existing authorities and to augment those, he said.
He added that splitting bank supervision and monetary policy did not work in the United Kingdom and would be a bad idea in the United States.
At a tense, hour-long meeting on Friday, Geithner told Bair, Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Mary Schapiro to end recent public criticism of the administration's plan and stop airing concerns over their potential loss of authority.
Treasury spokesman Andrew Williams said, We planned this meeting as a venue to deliver a tough message to regulators that we should work together to get reform done, and focus less on protecting turf.
(Reporting by Patrick Rucker, Kevin Drawbaugh, David Lawder, Karey Wutkowski, with Jonathan Stempel in New York)