Senate Banking Committee members on Tuesday challenged a key call the Obama administration made on regulatory restructuring — to keep oversight spread over several agencies.

Chairman Chris Dodd kicked off a hearing by noting that several past administrations have sought the creation of a single banking regulator and wondering if that approach would be better.

"Is the administration's proposal really enough, or should we be listening to previous administrations … that greater consolidation should be the next step?" Dodd asked.

The Connecticut Democrat was seconded by other leading members of his panel, including Sens. Charles Schumer, D-N.Y., Jon Tester, D-Mont., and Mel Martinez, R-Fla.

"There are reasons for one strong, powerful, efficient regulator, and I think more people who are objective, who don't have any turf considerations when they look up on high, tend to think that should happen in the banking area," Schumer said.

All four lawmakers questioned a panel of banking regulators about consolidation, arguing that it could improve efficiency in the system and guard against regulatory arbitrage.

Under the Obama plan, Congress would combine two agencies: the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Though Treasury Secretary Tim Geithner contemplated recommending the creation of a single banking regulator, the administration ultimately decided such a plan would not garner enough political support.

But Dodd's comments suggested he is considering going that route anyway. If he does, that could further complicate the reform effort and bring more opposition from community bankers, who adamantly oppose the creation of a single banking regulator, fearing it would cater to the largest institutions. Community bank opposition has already slowed the proposed creation of a consumer protection agency, a crucial goal of Obama's plan.

Though Federal Deposit Insurance Corp. Chairman Sheila Bair said consolidating regulators would not address problems that led to the financial crisis, Dodd said the goal of regulatory reform was beyond that. "This is not just addressing the problems that occurred," he said. "But going forward, in a different century, the idea that we would maintain the same architecture we've had for decades. … Is this architecture going to be sufficient to maintain safety and soundness in a very different economic environment?"

The questions produced something of a split among banking regulators. Bair and John Bowman, acting director of the Office of Thrift Supervision, clearly opposed creating a single prudential supervisor, but Comptroller John Dugan and Federal Reserve Board Gov. Dan Tarullo left the door open to further consolidation. Tarullo acknowledged that a single regulator would have advantages, but warned about potential costs, particularly if the Fed were stripped of its supervisory role.

"There are also some costs going with single regulator. The Fed for example, loses some insight into how banks are actually functioning," he said.

Dugan said that a single regulator was likely going too far, but that there was more room for combining regulators. "If at the end of the day we bring everything in one place it would probably be too much," he said. "There are things that you could do that would simplify things in the future."

Bair raised practical objections to the plan, arguing that leaving the FDIC just as an insurer without supervisory authority was a mistake. "As the deposit insurer, we find it extremely helpful to have people on the ground, in banks all the time," she said. "It helps us a lot and gives us a window into seeing what's going on in banking."

But her concerns were rejected by Schumer, who said there were conflicts of interests between the FDIC as insurer and as a banking regulator. "I do think there is a good argument that the insurer should be separate from the regulator, because there are different concerns," Schumer said.

Schumer took issue with the idea of letting the Fed and FDIC retain oversight of state banks given that 54 of the 69 banks that failed this year were state-chartered banks, which they help regulate.

"Could you explain to me why the FDIC and Fed should keep state-chartered banking supervision, particularly if we are giving the Fed more responsibilities in other areas?" he asked. "Why shouldn't we at the very least merge the FDIC and Fed supervision of the state-chartered banks if you are not going to have the same supervisor?"

Other lawmakers also suggested further consolidation was needed.

"We've got a myriad of regulators out there," Tester said. "I just think this is an opportune time in the middle of a crisis to really take a look at our regulation system and say let's simplify."

Lawmakers also raised concerns with a Wall Street Journal report that Geithner had urged regulators at a private meeting last week to stop opposing pieces of reform and fall into line. According to the article, Geithner engaged in an expletive-ridden dressing-down of regulators for their objections to the plan.

Asked by Sen. Bob Corker, R-Tenn., about the meeting, Dugan said it was a "candid conversation" about regulatory reform.

Though the banking agencies are independent, a Treasury spokesman said the meeting was appropriate. "We planned this meeting as a venue to deliver a tough message to regulators that we should work together to get reform done and focus less on protecting turf," he said.

If Geithner hoped the meeting would tone down opposition by regulators, he was disappointed by their testimony at the hearing. Bair continued to voice objections to giving the Fed systemic risk power, reiterating an alternative that would create a more powerful systemic risk council. Dugan opposed the administration's proposal to eliminate preemption of state consumer protection laws, and all four regulators opposed giving their consumer protection powers to a new agency.

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