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Traction for Banking Regulation

WASHINGTON — The prospect of a financial regulatory overhaul’s passing Congress brightened on Thursday, as representatives of the banking industry left a meeting with the Treasury secretary saying that they had agreed on the need to get a bill through Congress this year.

Members of the Senate Banking Committee, which has wrestled for months over the legislation, said they believed an accord might be possible, though significant differences remained over the extent of new consumer protections, among other matters.

Richard C. Shelby of Alabama, the senior Republican on the panel, said that he and the committee’s Democratic chairman, Christopher J. Dodd of Connecticut, who met on Wednesday evening, “agree on probably 90 percent” of “just about everything” in the legislation.

In a meeting on Thursday at the Treasury, the secretary, Timothy F. Geithner, warned officials from eight industry associations that failure to enact the overhaul would destabilize markets and hamper the ability of the United States to contribute to international discussions over regulatory modernization, according to several participants.

“He spent a lot of time listening, but he opened it by saying that they were going to push hard to really get this bill done and get it done in the near term,” said Edward L. Yingling, president of the American Bankers Association.

He added, “Everybody in the room from the private sector indicated that their wish would be to get a bill done this year — and that they were in fact working to that end.”

A major point of agreement is the need for a new entity to detect systemic risks and prevent them from damaging the financial system. There is widespread support for a council of regulators, led by the Treasury secretary, to oversee that task, but the extent of its powers, and the role of the Fed within that council, remain uncertain.

The greatest area of disagreement has been the proposal for a stand-alone agency to combat abusive and deceptive mortgages, credit cards, payday loans and other consumer products. Much of the banking industry has opposed the idea.

The Obama administration this week reiterated its support for an agency with the power to make and enforce rules, but left open the possibility that it could be housed within an existing body.

According to a person briefed on the negotiations, Mr. Dodd has agreed to give way on a freestanding agency but has fought to create a regulatory entity that would have an independent chairman and budget, and oversight over nonbank financial institutions, like payday lenders.

Elizabeth Warren, the Harvard Law professor who first proposed the agency, said in an interview on Wednesday that the agency should stand alone. “I keep looking for the word independence,” she said.

Opponents say the agency would interfere with “prudential supervision,” the duty of federal regulators to ensure the “safety and soundness” of banks.

Members of the Banking Committee said they were divided on the question.

Existing regulators should take on consumer protection, “and it should be raised to the same level of visibility and responsibility as safety and soundness,” said Senator Judd Gregg, Republican of New Hampshire.

Senator Sherrod Brown, Democrat of Ohio, said “the fundamental thing is that the language be strong enough,” and that if the agency does not stand alone, “we can still do it right, mostly.”

Another area in which the Obama administration has faced opposition is the so-called Volcker rule, a proposal to ban banks from owning hedge funds and private equity funds and from risking their own money making market bets — a practice known as proprietary trading.

Some officials have said that the objective of the proposal — named for Paul A. Volcker, a former Federal Reserve chairman — could be achieved under a provision in the House overhaul adopted in December. That provision would let regulators ban speculative trading by banks if it is deemed too risky.

A White House spokeswoman, Jennifer Psaki, said on Thursday that the administration was committed to the rule.

But the current Fed chairman, Ben S. Bernanke, expressed skepticism on Thursday about the feasibility of the proposal.

“If you go about imposing the Volcker rule, I think it would be difficult to do it on a purely legislative basis, because of the potential for having unintended consequences,” Mr. Bernanke told the banking committee at a hearing. “So while on the one hand, you may want to restrict purely proprietary trading, you want to distinguish that from appropriate hedging behavior.”

Banks that benefit from the government safety net can be prevented from taking excessive risks through several measures, including increased capital requirements, restrictions on executive pay and controls on risk, Mr. Bernanke said. He said that regulators arguably already had the authority to crack down on speculative trading, “but if Congress wanted to reinforce that, it couldn’t hurt.”

Mr. Bernanke has his own worries; several senators have called for stripping the Fed’s bank supervision powers as part of the regulatory overhaul.

The industry representatives who met with Mr. Geithner opposed that idea. “There was widespread agreement on the need to strengthen the Fed, not weaken it,” said Steve Bartlett, president of the Financial Services Roundtable.

Senators said that several areas remained under active discussion, among them whether to create a large exemption from new rules that would subject over-the-counter derivatives to more transparent trading and how to dissolve a large company before it became “too big to fail,” so that a government bailout was not needed.

Jodi Kantor contributed reporting.

A version of this article appears in print on  , Section B, Page 1 of the New York edition with the headline: Traction For Banking Regulation. Order Reprints | Today’s Paper | Subscribe

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