Consensus is building in the Senate for legislation that would significantly weaken the Federal Reserve by stripping its power to oversee banks and hand that job to a single federal bank regulator.
The proposal by Senate Banking Committee Chairman Christopher Dodd to merge federal prudential oversight into a single regulator differs from a plan by President Barack Obama. But it's gaining traction among Dodd's colleagues who think the Fed didn't do enough to prevent the current market crisis.
"If you look at the record here of the failure of the regulatory bodies, all roads seem to lead to the Federal Reserve," said Sen. Richard Shelby of Alabama, the top Republican on the banking panel.
Since its creation almost a century ago, the Fed has grown into a major power broker and guardian of the financial system. It plays various roles on the government's behalf in protecting the economy, including the supervision of banks to ensure the "safety and soundness" of the financial system and enforcement of rules to protect consumers.
But the Fed's primary mission is considered its role as the nation's central bank.
As part of a sweeping reform effort in response to last year's financial crisis, Obama has proposed empowering the Fed further by tasking it with deciding whether a financial institution has grown so big and over-leveraged that its failure could bring down the entire economy.
However, Obama would strip the Fed of its role in protecting consumers and create a separate government agency to enforce new rules on such products as credit cards and mortgages.
The idea of an emboldened new Federal Reserve isn't sitting well on Capitol Hill, where lawmakers have little power over the central bank. While the Fed frequently reports to Congress, it maintains an independent status aimed at keeping politics out of the nation's monetary policy.
The House Financial Services Committee this week will hold a hearing on legislation by Rep. Ron Paul, R-Texas, that would subject the Fed to increased audits by congressional watchdogs.
Treasury Secretary Timothy Geithner has said the administration didn't advocate a more streamlined regulatory system because it wanted to focus its energy on adding protections for consumers and policing institutions deemed "too big to fail."
"We did not want to put you in a position of having to spend a lot of time on changes that may be desirable, that may leave us with a neater system, maybe a more efficient system, but were not central to the cause of the problem," Geithner told the Senate panel this summer.
In private deliberations with the administration and other senators, Dodd, a Connecticut Democrat, has advocated since spring an alternative plan that would strip the Fed and Federal Deposit Insurance Corporation of their roles in helping regulate state-chartered banks and replace them with a single federal prudential regulator.
Dodd also is expected to reject Obama's suggestion that the Fed monitor systemwide risk and decide whether an institution's existence threatens the economy.
Instead, Dodd wants to establish a council of regulators, a panel that would include the Fed. An independent chairman would likely make the final decision on whether the government should intervene and dismantle a firm.
While Dodd differs from Obama on the plan on those two points, he supports the president's idea to strip the Fed of its consumer protection duties and create a new Consumer Financial Protection Agency. That issue has become a sticking point in his negotiations with Republicans, who contend the agency's creation would be too burdensome for community banks.
In the House, Rep. Barney Frank, D-Mass., was expected to propose a regulatory reform bill that is closer to Obama's proposal.
While that legislation would likely set the tone for the debate, the negotiations in the Senate were considered more crucial to the final outcome. Democrats hold a slim majority in the Senate, where 60 votes are usually needed to overcome Republican opposition.