Nov. 10 (Bloomberg) -- Senator Christopher Dodd proposed creating a single U.S. bank regulator and stripping supervision from the Federal Reserve and Federal Deposit Insurance Corp. in legislation aimed at preventing a repeat of the credit crisis.

Dodd, chairman of the Senate Banking Committee, would eliminate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and fold the Treasury Department units into the Financial Institutions Regulatory Administration, according to draft legislation released today in Washington.

“Our proposal will replace the myriad government agencies that failed to rein in risky schemes with a single, accountable federal banking regulator,” the Connecticut Democrat said at a news conference.

The U.S. bank regulation system may have led to lax oversight by encouraging a “race to the bottom” by agencies to win oversight of banks and thrifts, Dodd has said. His measure goes further than proposals by President Barack Obama and House Financial Services Committee Chairman Barney Frank to merge the OTS and OCC as part of efforts to prevent recurrence of the worst economic crisis since the Great Depression.

“Those institutions that would undermine the security of our economy will no longer be able to shop for the weakest regulator,” Dodd said.

The legislation creates a Consumer Financial Protection Agency, a separate regulator to maintain market stability and a mechanism for the FDIC to unwind failing “systemically significant” financial firms. Costs for unwinding firms would be recouped from firms with more than $10 billion in assets, according to a summary of the draft.

Funding Failures

Dodd’s plan for covering failures is at odds with an approach favored by Frank and FDIC Chairman Sheila Bair, who want to have companies pay into a fund before a collapse occurs.

“This pre-funded approach can assure that taxpayers will not once again be presented the bill for these failures,” Bair said today at a speech at a New York conference. “Building a resolutions fund balance in advance would also help prevent the need for imposing assessments during an economic crisis.”

The new banking regulator would be led by an independent chairman appointed by the president and a board including leaders of the Fed, the FDIC and two other independent members. It would be funded primarily by assessments on the industry.

The changes would let the FDIC focus on its roles as deposit insurer and resolver of failed firms, while the Fed would focus on monetary policy “without being distracted by responsibilities for bank oversight and consumer protections,” according to the summary.

‘Failed Miserably’

The single bank regulator “failed miserably” in Great Britain and “would inevitably undermine the state-chartered banking system and be detrimental to community banks,” American Bankers Association President Edward Yingling said in a statement.

Dodd proposed an Agency for Financial Stability to monitor and alleviate systemic risks posed by large, complex firms. The agency would give regulators authority to break up large firms deemed to pose a threat to U.S. financial stability.

The stability panel would be led by a nine-member board including an independent chairman appointed by the president, and members from regulators including the Fed, the Treasury and the new Consumer Financial Protection Agency.

Compromise

Dodd, who is seeking re-election next year, is releasing his proposal after failing to reach a compromise with Senator Richard Shelby, the banking committee’s top Republican whose support would ease passage of the legislation in the Senate. Shelby of Alabama opposes setting up a standalone Consumer Financial Protection Agency.

“That door is very much open,” Dodd said. “I’d very much like to have their input and participation in this bill.”

Dodd’s measure aims to enact the plan Obama released in June for strengthening U.S. oversight of Wall Street to prevent a repeat of the financial crisis following the collapse of the subprime mortgage market in 2007. He said his panel will begin weighing changes to his proposal in the first week of December before a vote that would send it to the full Senate.

The House Financial Services Committee approved legislation to set up a consumer agency, tighten rules for derivatives and require federal oversight of hedge funds. Frank, a Massachusetts Democrat, has said he expects the full House to vote on his regulatory package this year.

The regulatory-overhaul legislation must be passed by the House and Senate and signed by the president to become law.

To contact the reporter on this story: Alison Vekshin in Washington at avekshin@bloomberg.net.

Last Updated: November 10, 2009 13:44 EST