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U.S. regulators testify on financial reform

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U.S. lawmakers warned regulators not to let infighting or intimidation get in the way of their new responsibility to spot and defuse the next financial crisis before it becomes an economic disaster.

Federal Reserve Chairman Ben Bernanke and five other top officials testified as a group on Thursday for the first time on how they intend to turn more than 800 pages of financial reform legislation into a workable regulatory regime.

Although regulators put up a united front and pledged close collaboration, members of the Senate Banking Committee expressed concern that reports of conflicts between the agencies were already filtering out.

"I sense a slightly less playing-well-together than appeared," said Republican Senator Bob Corker.

Lawmakers focused on the risk council established under the Dodd-Frank reform law enacted two months ago to try to close gaps in oversight laid bare by the worst financial crisis and recession since the Great Depression.

The council, which will meet for the first time on Friday, brings together regulators from various agencies and departments -- a move designed to provide a broad view of the financial system, but one that could also breed conflict.

The council on Friday plans to begin tackling two of the most contentious issues: putting in place the Volcker rule, which restricts risky bank trading, and drawing up a list of firms deemed too big to fail that will face closer scrutiny.

Senator Christopher Dodd, who chairs the Senate Banking Committee, said the risk council was intended to be a "collective gathering of equal partners" even though the Treasury Department chairs it and the Federal Reserve is likely to play a principal role.

"I would expect that no one would hide behind the work of the Fed or the Treasury nor to be intimidated by it," Dodd said, adding that the council would need to "create a new culture" of cooperation.

ALL TOGETHER NOW

At Friday's risk council meeting, regulators will consider seeking public comment on putting in place the Volcker rule and compiling the list of too-big-to-fail firms.

Long before any rules are written, banks moved to reorganize their operations to separate some of their risky trading desks. Bank of America Corp is cutting as many as 30 employees who traded for the bank's account, a person familiar with the move told Reuters on Wednesday, and other banks have reduced their in-house trading desks as well.

The hearing was only sparsely attended by senators, many of whom had already made plans to leave town to campaign for the November 2 congressional election.

Some Republicans have said they would seek to roll back some regulatory provisions if their party wins control of one or both houses of Congress in November's election.

Senator Richard Shelby, the committee's top-ranking Republican who would be chairman next year if his party wins enough seats to control the Senate, called the regulatory reforms a symbol of big-government Democratic policies.

"The Dodd-Frank legislation adheres to the worn-out Washington theory that more is better," Shelby said, adding the law "delegated to bureaucrats" the authority to devise dozens of financial market rules.

Shelby told Reuters last week he would reopen the reform bill if he chairs the banking committee.

'RE-WRITING EACH OTHER'S RULES'

The Federal Deposit Insurance Corp has been at the center of tensions among regulators. FDIC Chairman Sheila Bair said agencies would have to collaborate and share information to get the reform job done.

Regulators must write hundreds of new rules under a tight deadline, and concerns are growing that the timeline might be slipping. Congress also has yet to allocate funding needed to pay for the reform measures.

The Commodity Futures Trading Commission on Friday will propose its first rules targeting a part of the financial market blamed for exacerbating the financial crisis.

Earlier this week, the FDIC put off a scheduled vote on starting to implement its new authority to liquidate large, failing financial institutions because other regulators said they wanted more time to review the proposal.

There also has been disagreement over the FDIC's decision to move forward on a rule that gives federal "safe harbor" protection to securities backed by home loans and other consumer debt that requires banks to retain 5 percent ownership interests in the loans. The rule would protect these securitized assets in the event that a bank fails and is seized by regulators.

"If we all start trying to rewrite each other's rules... this council will become an impediment, not a way to facilitate reform," Bair said.

Senator Mike Johanns, a Republican who served in former President George W. Bush's cabinet, said he welcomed a bit of conflict.

"I have to tell you that quite honestly I see conflict as somewhat of a positive thing," he said.

"Sheila Bair, if we wanted your boss to be (Treasury Secretary) Tim Geithner we could do that, but we don't want that. We like a certain amount of independence."

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