Dodd's Proposal Stirs Debate

NEW YORK (TheStreet) -- Sen. Chris Dodd would like to streamline banking regulation. Good luck.

Under a 1,136-page proposal outlined on Tuesday, the Connecticut Democrat would strip the Federal Reserve of its supervisory power over banks. The Fed's ability to issue emergency loans, as it did for the rescue of American International Group(AIG Quote) would also be erased.

The Fed would instead focus on its primary job all along: Adjusting interest rates to promote sensible economic growth.

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Banks would be overseen by a newly created Financial Institutions Regulatory Administration, or FIRA. The Federal Deposit Insurance Corp. would be charged with handling -- and, if need be, dismantling -- firms deemed "too big to fail." A Consumer Financial Protection Agency would do what its name implies, and an Agency for Financial Stability would be broadly responsible for monitoring systemic risk. The Fed chairman would hold a seat on its board, along with eight other appointees.

The idea of restructuring the regulatory powers that be in such a manner has been floated by policy wonks since the start of the financial crisis. However, the Fed's future power -- or lack thereof -- has been a hotly debated issue.

One camp believes the central bank failed to adequately monitor risk. Therefore, those powers ought to be doled out across a committee of agencies in order to ensure adequate checks and balances. Others say the institution needs reform, but that having political appointees make decisions about financial stability would set up a situation far more toxic than TARP.