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>> Wednesday 24 March 2010

e-owned banks is integral to the Fed's role in stabilizing the economy.

"Although it was not the case in the current crisis, instability can be generated by small institutions as well as by large ones, as occurred in the Great Depression or in the thrift crisis, to cite two particularly dramatic examples," Bernanke said Saturday.

Dodd's bill also includes also a version of the controversial rule proposed by former Fed chairman Paul Volcker -- and heralded by President Obama -- aimed at prohibiting financial firms from owning hedge funds or from engaging in proprietary trading on their own accounts.

But the Senate proposal isn't as strong as what Volcker suggested and empowering an oversight panel to set the rules banning proprietary trading.

Dodd wants the banking committee to vote before the next congressional recess, which is scheduled to start Friday. He wants to ensure the regulatory overhaul makes it to the Senate floor before the last week of May, because midterm elections could complicate getting a final agreement.

Consumer protection: The draft would create a consumer financial protection regulator housed inside the Federal Reserve. That differs from the House proposal, which calls for a stand-alone agency -- something Republicans and banks oppose.

The consumer regulator would be led by a director appointed by the president, confirmed by the Senate and bankrolled by the Fed. It would have the ability to examine and enforce consumer rules at mortgage banks and financial firms at banks and credit unions that have more than $10 billion in assets.

However, when it comes to payday loans and auto loans, the bill gives regulators the choice to review the products and set rules for regulation. Consumer advocates don't like that. Also, consumer protection rules could be vetoed by two-thirds vote of the proposed regulatory oversight panel.

Too big to fail: The bill would steer big financial firms teetering on the brink of collapse toward special bankruptcy proceedings, allowing them to wind down more quickly than under the existing system.

The bill includes a tax on the largest financial firms to create a resolution fund of $50 billion. The fund would be used to pick up part of the tab for banks and financial firms that need help beyond the bankruptcy system. There's also the possibility for additional taxes on large firms after a failed company has tapped the fund.

Early warning system: The Senate, like the House, wants to create a nine-member advisory oversight council of regulators who could

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