WASHINGTON — The fight to keep the Federal Reserve Board's role in banking supervision has finally been joined.

Fed Chairman Ben Bernanke on Thursday made his strongest public pitch to date to keep the central bank's powers intact, while industry lobbyists privately told Treasury Secretary Tim Geithner that they will work with the administration to press Congress on the issue.

Although there remains strong support in the Senate to strip the central bank of much of its power, the issue is key as the final reform bill takes shape.

"The ICBA will fight tooth and nail to preserve the Fed's role in bank regulation," said Camden Fine, president of the Independent Community Bankers of America, who along with other trade group representatives met with Geithner on Wednesday. "In our view, it is absurd to blind the Federal Reserve to 8,000 community banks on Main Street America. That's very poor public policy."

All eight of the industry groups attending the meeting, including the American Bankers Association and the Financial Services Roundtable, told Geithner much the same thing.

The administration, too, appears ready to dig in on the issue, with Geithner telling participants that a final bill must not significantly dilute the Fed's powers.

Their objections come as Senate Banking Committee Chairman Chris Dodd, Sen. Richard Shelby, the panel's lead Republican, and Sen. Bob Corker, R-Tenn., appear close to sealing a deal on a reform bill. (See related story.)

A draft of the bill would create a powerful new Financial Institutions Regulatory Administration that essentially merges the Office of the Comptroller of the Currency, Office of Thrift Supervision and the banking supervision authorities of the Fed. Unlike the administration's proposal, which would give systemic-risk oversight to the Fed, the Senate bill would give such power to the new agency.

The central bank would no longer have any role in banking oversight, losing its current authority to regulate holding companies and state member banks.

Bernanke, testifying before Senate Banking on Thursday, warned it would be a "grave mistake" to take the Fed out of bank supervision. He said the Fed has expertise that the other banking agencies lack.

"A bank supervisor, which focuses on looking at credit files, is not prepared to look at the wide range of activities of a complex international financial firm," Bernanke said.

"The Federal Reserve, in contrast, by virtue of its efforts in monetary policy, has substantial knowledge of financial markets, payment systems, economics and a wide range of areas other than just bank supervision."

Bernanke, whose tone was much stronger than in previous testimony and speeches, said he was puzzled that lawmakers were even contemplating taking power away from the Fed.

"It's hard for me to understand why, in the face of a crisis that was so complex and covered so many markets and institutions, you would want to take out of the regulatory system the one institution that has the full breadth and range of those skills to address those issues," he said.

In contrast to previous statements, which have largely focused on systemically important firms, Bernanke also defended his agency's oversight of state member banks.

"The Federal Reserve — although we've been very focused on large institutions over the last couple of years because of the crisis — that we also supervise a large number of community banks, state member banks, and they provide us very important information about the economy. We can learn from them what's happening at the grassroots level, what's happening to lending, and that kind of information is very valuable for us as we try to understand what's going on in the economy."

Whether there is enough political support to defend the Fed is an open question. In the Senate, the central bank has become the symbol for unpopular government bailouts.

But the Fed does have its defenders, particularly in the House, which passed a reg reform bill that would expand, not limit, the central bank's powers. Assuming the Senate bill stays in its current form, the Fed is likely to be a key debating point when the House and Senate compromise on a final bill.

Importantly, some senators also stuck up for the central bank on Thursday.

"I count myself as one who thinks the Fed should maintain a supervisory role," said Sen. Evan Bayh, D-Ind. He later added it was important to not "scapegoat" the Fed.

Sen. Judd Gregg, R-N.H., also came to the Fed's aid.

"I do think it's important that you should be a major player in the regulatory atmosphere," he told Bernanke, "and your mistakes are no more egregious than others."

But Sen. Jack Reed, D-R.I., said the Fed would likely at least lose some authority.

"I don't think it's going to maintain its current role completely," he said.

"I think there's changes that will be adopted. … There seems to be an emerging consensus that regulation of small state institution member banks is probably not something on the forefront, that could be done by the FDIC."

It is also unclear how much sway the industry will have with senators. To date most industry lobbyists have focused on other issues, including the creation of a consumer protection agency.

But the trade groups pledged to help defend the Fed during their meeting with Geithner.

"Among the bank trade associations there was unanimous support for the Fed's independence and keeping the Fed involved in bank regulation, and we indicated we would be working on that issue," said Ed Yingling, the ABA's president.

"It needs a significant role in bank regulation to include large institutions and … state member banks. We talked about the need for the Fed to have that window into the banking system around the country, and not just stay totally focused on the largest institutions."

Rob Nichols, the chief operating officer of the Financial Services Forum, which represents the country's largest banks, said the Fed is a major issue for the administration and the industry.

"We talked about the Fed's role in the context of reg reform, specifically, the importance of preserving the Fed's role in supervision over banks , which compliments its monetary authorities, about the Fed having a role in terms of systemic supervision, and the importance of preserving the independence of the Fed going forward," he said.

Steve Bartlett, the president of the Financial Services Roundtable, said much of the meeting concerned the Fed "and the need to strengthen their role, not weaken it."

"We share with our colleagues a real alarm bell that some in Congress are trying to weaken the Federal Reserve, and think that would be bad for the economy and Main Street," Bartlett said.

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