Nobody knows the banking system like the Fed. What better place, then, to house a consumer financial protection agency (CFPA)? The Fed's insight into the banking system leaves it well-positioned to develop, coordinate, and implement new and existing rules applicable to credit cards and other consumer financial services products. Rather than create a completely new federal bureaucracy to govern the regulation of consumer financial services products, as proposed by the House of Representatives, the Senate proposes a more measured response: house the CFPA in the Fed.

As Craig Torres and Yalman Onaran of Bloomberg Business Week are reporting in their article, "Consumer Agency Within Fed Seen as Victory for Banking Industry," the debate about whether to have an independent CFPA boils down to this:

Banks say placing the agency with the Fed alleviates their concern that an independent entity would ignore the health of the financial system. Consumer advocates say it’s a mistake because the Fed didn’t succeed in curbing abuses during the subprime lending boom that contributed to the worst financial crisis since the Great Depression.

Representative Barney Frank, chair of the powerful House Financial Services Committee, calls the Senate proposal "a joke," and has lashed out at the Fed, calling its track record of consumer protection its "most conspicuous failure." On the other hand, Senator Chris Dodd, chair of the Banking Committee, is pushing a CFPA that "would create a bureau within the Treasury Department or within a new overarching bank regulator that would have authority to write consumer-protection rules."

So what is the likely outcome? Negotiations in Washington are accelerating, but the issue is so divisive that attempts to find middle ground could thwart the entire effort. As Jim Kuhnhenn reported in the AP, "Dodd, Corker regulatory offer gets cool reception," when the new proposal came up yesterday in the Banking Committee, it achieved virtually no traction.  

Stay tuned...