Fed comes in from Senate deep freeze

WASHINGTON — The Federal Reserve, once in danger of being stripped of its bank supervision powers by the Senate, is getting a second look from key lawmakers amid a new flurry of bipartisan negotiations over a massive overhaul of the rules that govern Wall Street.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., and Republican Sens. Richard Shelby and Bob Corker are now looking at letting the Fed keep some of its regulatory authority after all.

"The question before the committee is, do we exclude the Fed entirely or do we bring them back, keep some type of regulatory authority... with the Fed," Shelby said Thursday. Shelby has been one of the main critics of the Fed's conduct as a banking regulator.

The surprise second-look comes as Shelby, who had reached a negotiating impasse with Dodd two weeks ago, re-entered the talks in a meeting with Dodd late Wednesday. Dodd had been negotiating with Corker since he and Shelby deadlocked. It also comes as Fed Chairman Ben Bernanke, testifying to the Banking Committee, and Treasury Secretary Timothy Geithner, meeting privately with banking industry officials, made a vigorous case Thursday for retaining the Fed's regulatory authority.

What role the Fed plays in regulating banks is important because it acts as the industry's lender of last resort and sets key interest rates that affect the pulse of the economy. It supervises bank holding companies and state chartered banks. Bankers in particular want the Fed to retain its regulatory authority, arguing that without it the Fed would be handcuffed in setting monetary policy.

Two people familiar with Geithner's meeting with industry officials Thursday said the treasury secretary assured them that he agreed and would work to keep the Fed's regulatory powers. The sources spoke on the condition of anonymity because the discussion was private.