The Obama administration is expected to propose legislation by June calling for the U.S. Federal Reserve to play a central role in regulating systemic risk in the economy, trade association sources said on Friday.

Now that the U.S. bank stress tests are over, the administration is refocusing on a drive to tighten regulation of banks and markets to prevent another financial crisis like the one that is currently ravaging economies worldwide.

Systemic risk refers to problems in the financial system large enough to damage the overall economy. For instance, the government last year bailed out insurer American International Group because its failure was seen as a systemic risk.

Beyond that, there is little agreement among officials about the much-debated idea of setting up a government regulator to monitor and manage systemic risk.

The administration left the door open to further discussion in remarks by a Treasury Department spokesman.

Treasury Secretary Timothy Geithner is open to the possibility of a council to coordinate among bank regulators, including the agency overseeing the stability of the system as a whole, the spokesman told Reuters on Friday.

Secretary Geithner believes that we need a single independent regulator with responsibility for systemically important firms and critical payment and settlement systems, spokesman Andrew Williams said.

He does see a role, however, for a council to coordinate among the various regulators, including the systemic risk regulator, Williams added.


The systemic risk regulator proposal would have to dovetail with other administration initiatives, including empowering the government to seize and resolve the problems of large, non-bank financial firms, using the established bank resolution authority of the Federal Deposit Insurance Corp as a model.

The administration is committed to enacting proposals into law this year, the trade association sources said. The sources also said their information came from a briefing administration officials held with industry executives on Friday.

National Economic Council Director Lawrence Summers, a senior adviser to President Barack Obama, will lead the effort on regulatory restructuring, the sources said.

Geithner told Reuters Television on Friday the administration wants to move swiftly. We're going to be laying out to the Congress the broad comprehensive framework within the next couple weeks, and we hope to move forward quickly with legislation, he said.

Briefing participants said a specific timetable was not presented, but that the House of Representatives Financial Services Committee is expected to approve a bill by July 4.

Representative Barney Frank, the Massachusetts Democrat who chairs the committee, has said he wants to enact a bill to overhaul financial regulation this year, as well.

(Additional reporting by Karey Wutkowski, David Lawder and Mark Felsenthal)