Senator Chris Dodd's concerted push to create a single banking regulator is driving a growing debate over whether consolidated supervision would threaten the dual banking system.

On one side are community bankers and Federal Deposit Insurance Corp. chairman Sheila Bair, who argue that a single regulator would focus all its attention on the largest institutions, leading to policies that would disadvantage smaller, state-chartered banks.

But proponents of a single regulator say those concerns are overblown and argue that protections can be built into the system to ensure community banks are not shortchanged.

"All the new consolidated supervisor is doing is assuming the federal component of the existing supervisory framework," says Eugene Ludwig, the chief executive at Promontory Financial Group and a former comptroller of the currency. "I can envision a consolidated supervisor reducing burdens in respect of community bank regulation and supervision and actually enhancing the community bank franchise."

Dodd, the chairman of the Senate Banking Committee, has championed the idea for months, but only recently has he signaled his intention to pursue a bill that would consolidate regulators.

Under the Obama administration's plan for regulatory reform, the Office of the Comptroller of the Currency and the Office of Thrift Supervision would be merged into a single national bank supervisor, while Federal Deposit Insurance Corp. and Federal Reserve Board oversight of state-chartered banks would remain intact.

But Dodd, a Connecticut Democrat, wants to strip the Fed and FDIC of their state supervisory responsibilities and hand them to a new, more powerful Office of the Comptroller of the Currency. (The Office of Thrift Supervision would also be combined into the new agency.)

"It's clear that we must eliminate the overlaps, redundancies and additional red tape created by the current alphabet soup of regulators," Dodd said at a hearing in September. "We don't need a super regulator with many missions, but a single federal bank regulator whose sole focus is the safe and sound operation of the nation's banks. A single operator would ensure accountability and end the frustrating pass-the-buck excuses we've been faced with."

Some other members of the Senate panel, including Sen. Mark Warner, support Dodd's idea. Warner, a Virginia Democrat, told U.S. Banker's sister publication, American Banker, that the current system encourages banks to "shop for the weakest regulator."

Ludwig agreed that having too many bank regulators leads to regulatory arbitrage, while creating unnecessary regulatory burdens.

"The worst feature of our current system is that for all the different regulators, the backup supervision and the volumes of regulation has not produced superior safety and soundness results," he says. "As the current crisis and the past several debacles have shown, our current expensive and burdensome system does not work."

Still, even if Dodd's plan gets out of the Senate - a big if - it faces long odds in the House. House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, has said he does not think there is the political will to create a single prudential regulator. Community bankers are a key constituency after all, and their belief is that a single regulator would give preferential treatment to the largest banks and put the dual banking system at risk.

A recent survey of banking executives conducted by American Banker shows that large and small banks are sharply divided on the idea of consolidating regulators.

More than 71 percent of bankers from large banks said regulatory agencies should be consolidated as part of the regulatory reform effort that is under way in Washington. But executives from smaller banks, who made up a larger proportion of the 206 respondents, were less enthusiastic. Only 39 percent supported consolidation.

"The reason the big banks want the regulatory agencies consolidated is because that plays into their hands," says Camden Fine, the president of the Independent Community Bankers of America. "That allows them to have much more influence over whatever single regulator exists. When you have less than 10 banks that control over 50 percent of the financial assets of the United States, who do you think the single regulator would be captive to?"

Nicholas J. Ketcha Jr., a managing director at the bank consulting firm FinPro and a former director of supervision for the FDIC agreed that consolidation would help the biggest banks - nationally chartered institutions with bank holding companies - by allowing them to deal with fewer examiners.

"The smaller banks still prefer the choice," he says. "There are a lot of them that like to be a state charter, because they feel they have a more local ear with the state regulators."

Community banks have a powerful ally in Bair, who has openly opposed the idea of consolidating regulators. "A single regulator's resources and attention would be focused on the largest banks," she wrote in an op-ed published in the New York Times in September.

Dodd, for his part, has promised that his proposal would not threaten the dual banking system, nor would it give large banks special treatment.

"Any plan to consolidate bank regulators would have to ensure community banks are treated appropriately," he said at the September hearing. "Community banks did not cause this crisis and they should not have to bear the cost or burden of increased regulation necessitated by others."

Dodd has suggested creating a division within the new federal agency devoted exclusively to state banks, noting that the OCC already has separate divisions for large, midsize and small banks.

Still, that's unlikely to appease community bankers. For all the arguments against a single regulator, their opposition is driven mostly by a resistance to change, according to Doug Elliott, an economics studies fellow at the Brookings Institution.

"There is always a strong bias in keeping the regulator you have," he says. "You know how they operate and usually you've developed friendships and alliances, you are more comfortable and know how to get your voice heard."

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