As the debate over regulatory reform unfolds, a key question is just how much control over large companies should be vested in one agency.

The Obama administration wants to hand sole authority to identify and oversee companies that pose systemic risks to the Federal Reserve Board. A council of eight regulators would be created to advise the Fed, but the central bank would not have to heed its recommendations.

Proponents praise this model as nimble, efficient and accountable, and say the Fed is the obvious choice for the job.

But critics claim the Fed already has a wide range of responsibilities, some of which it failed to fulfill in the run-up to the crisis, and should be counterbalanced by a strong advisory council.

Karen Shaw Petrou, managing director for Federal Financial Analytics Inc., neatly summed up the question: "The real heart of the matter is the qualms with the Fed and the lack of a clear alternative to it as a systemic risk regulator."

Dealing with systemic risk is a key goal of President Obama's 88-page proposal to revamp financial services oversight.

The administration envisions that the council would serve as a forum for discussing systemic risk issues and identifying gaps in regulation. But it would have no supervision, enforcement or rule-writing authority. The Fed would hold all those powers.

In an interview Friday, Michael Barr, the Treasury Department's assistant secretary for financial institutions, reiterated the point both the administration and Fed officials have made time and again — this proposal simply builds on the Fed's existing mandate.

"The Federal Reserve Board is our central bank and the central bank should be involved in the supervision of the largest, most systemically important firms," Barr said. "They are already regulating the largest, most interconnected firms in the country so it is, in our mind, a modest expansion of that authority."

As one might expect, the Federal Deposit Insurance Corp., which would get a seat on the council, wants its authority beefed up.

"This council ends up falling by the wayside if it's got no teeth," said Paul Nash, FDIC deputy to the chairman for external affairs.

Sentiment on Capitol Hill is more closely aligned with the FDIC position. There have already been five hearings on the best way to ensure a large company does not threaten the financial system and the Fed has come in for more than its fair share of criticism. On Friday, Rep. Paul Kanjorski, D-Pa., became the latest lawmaker to weigh in. "I have extreme doubts about the Fed" as systemic risk regulator, he said at a House Financial Services Committee hearing. "I don't know how they can manage that and all monetary policy decisions."

Even the panel's chairman, Barney Frank, who once supported making the central bank the sole systemic risk regulator now says that is not politically feasible. "I originally said the Fed," the Massachusetts Democrat said in a May interview. "I think politically there's going to be a problem with that, and I think some form of group is going to have to do it."

The Fed's primary job is to run the country's monetary policy, but it also regulates financial holding companies, some state-chartered banks and the payments system. It has a big say in how consumers are protected from financial fraud.

That list leads to concern about putting even more power in the Fed's hands.

"Should we create the be-all-end-all super regulator?" asked Kevin Jacques, the Boynton D. Murch Chair in Finance at Baldwin-Wallace College and a former Treasury official. He laid out the pros and cons and concluded the Fed should get input from other agencies.

"The Fed, despite its expertise and brilliance, can't solve this on their own," he said.

Ernest Patrikis, a lawyer at White & Case LLP and a former official at the Federal Reserve Bank of New York, said he suspects the central bank would pay close attention to advice it got from the council, which beyond the FDIC chairman would include the Fed chairman, Treasury secretary, the new national bank supervisor, the head of the new Consumer Financial Protection Agency, the chairs of the Securities and Exchange Commission and the Commodity Futures Trading Commission and the director of the Federal Housing Finance Agency.

"If a council made a recommendation to the Fed, and it didn't follow it, I think the Fed would have some answering to do," he said.

Nash of the FDIC is not convinced, and argued it is another reason why the council needs more power. "You would have more opportunity for dialogue so rash actions aren't taken without proper vetting," he said.

Fed officials declined to provide substantive comment for this story, but noted Fed Gov. Dan Tarullo will testify on the issue Thursday before the Senate Banking Committee.

But Fed veterans were quick to defend the agency.

"There's a very good case for giving it to the Fed up front," said Gil Schwartz, a partner at Schwartz & Ballen LLP who used to work at the Fed. "The Fed was created to deal with systemic risk."

"You have to separate whether you like the people doing the job right now or whether the structure is a good structure," said Oliver Ireland, a partner at Morrison & Foerster LLP and a former Fed lawyer.

Ireland said a strong advisory council could just create barriers to action. "If you have too many checks and balances, you never get anything done," he said.

Schwartz agreed.

"Interagency councils don't work," he said. "There's too much rivalry. Someone has to be in charge."

That's exactly the point Treasury Secretary Tim Geithner has been making, saying a strong council "would risk more confusion and less accountability."

Bob Clarke, a senior partner at Bracewell & Giuliani LLP and a former comptroller of the currency, agreed — to a point.

"It's always easier if you just have one person to be accountable, but I don't think accountability goes away just because you have a council rather than one entity," he said.

Some sources cited a third option: create a new agency solely dedicated to gauging systemic risk.

William Isaac, a former FDIC chairman, said it should be an independent agency chaired by a presidential appointee. "It must have some teeth," he said. "It must be independent. It shouldn't be an arm of the Department of Treasury."

Bill Longbrake, an executive in residence at the University of Maryland, said the agency could be modeled after the Congressional Budget Office or the General Accountability Office, reporting directly to Congress. Existing regulators would coordinate and provide data to this new agency.

"Such an arrangement would reduce the potential for subordination of risk assessment to other matters, as would be the case if systemic risk assessment were a Fed responsibility, or the potential for delay and watered down findings and recommendations as would be the case for a council," he said.

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