WASHINGTON — As lawmakers return to Capitol Hill, a top Federal Reserve official is once again making the case for preserving and expanding the central bank's oversight of the financial system.

According to an advance copy of a speech he plans to give Wednesday, William Dudley, president of the Federal Reserve Bank of New York, argues the Fed is best positioned to monitor systemic risk.

"Three broad areas of the financial system need to be continuously evaluated: large systemically important financial institutions, payments and settlements systems and the capital markets," Dudley said in the prepared remarks. "The Federal Reserve has experience and expertise in all three areas — it now oversees most of the major U.S. financial institutions; it operates a major payments system and oversees several others; and it operates in the capital markets every day in managing its own portfolio and as an agent conducting Treasury se-curity auctions."

While his audience is the Partnership for New York City, Dudley is clearly targeting members of the Senate, which will tackle regulatory reform in the coming weeks. While the House passed legislation that kept the Fed's supervision powers intact and gave it broad authority to curb systemic risk, there is bipartisan support in the Senate to narrow the central bank's role to monetary policy.

As many Fed officials have argued, Dudley said the central bank draws on its supervision powers to make monetary policy and act as a lender of last resort. "Information sharing with other agencies is simply not as good as the intimate knowledge and understanding of markets and institutions that is gathered from first-hand supervision," he said.

But one of the few areas of agreement between Senate Banking Committee Chairman Chris Dodd and Sen. Richard Shelby, the panel's top GOP member, is that the Fed's focus should be downsized to simply monetary policy. (Dodd met with President Obama on regulatory reform Tuesday afternoon.)

In light of the Fed's controversial response to the crisis, Dudley said "careful scrutiny is necessary, appropriate and welcome."

But he launched an extensive critique of efforts to require the Government Accountability Office to audit the Fed's monetary policy. The House approved legislation last month that would require the audits and a similar measure in the Senate has 31 co-sponsors.

"The notion that the Fed's financial dealings are somehow kept hidden from the public is a surprisingly widely held view — and it is simply incorrect," Dudley said. "Such a move would blur what has been a careful separation of monetary policy from politics."

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