By Alison Vekshin

Nov. 10 (Bloomberg) -- Senator Christopher Dodd will propose creating a single U.S. regulator that would strip the Federal Reserve and Federal Deposit Insurance Corp. of bank- supervision authority, said a person familiar with the matter.

Dodd, chairman of the Senate Banking Committee, would eliminate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and fold the Treasury Department units into the new bank regulator, according to the person, who spoke on condition of anonymity because the plan isn’t public. The Connecticut Democrat is scheduled to release a draft of his financial-regulation overhaul plan today in Washington.

“It makes sense to have one regulator that deals with supervision,” Gilbert Schwartz, a former Fed attorney and a partner at Washington law firm Schwartz & Ballen LLP, said in an interview. “You’ll see a real battle by the Fed and the FDIC to retain their supervisory authority.”

Dodd has faulted the U.S. bank regulation system, saying it encourages charter shopping and a “race to the bottom” by agencies to win oversight roles. His proposal goes further than proposals by President Barack Obama and House Financial Services Committee Chairman Barney Frank to merge the OTS and OCC.

FDIC Chairman Sheila Bair told Dodd’s committee in August that merging the four agencies is “no panacea” and Fed Governor Daniel Tarullo said the central bank should retain its authority over U.S. banks. The Fed and FDIC regulate state- chartered banks. The Fed also regulates bank-holding companies.

‘Consistent, Coherent’

“The idea of streamlining federal banking regulation has genuine merit,” said John Dearie, executive vice president for policy at the Financial Services Forum, a Washington-based trade group representing 18 of the largest U.S. financial firms, including Citigroup Inc. and Bank of America Corp. “Fewer federal agencies will mean more consistent, coherent and effective supervision.”

Shifting to a single bank regulator “will inevitably produce further industry consolidation and eliminate necessary regulatory checks and balances that have helped to strengthen our nation’s financial system,” said Neil Milner, chief executive officer of the Conference of State Bank Regulators.

“This is not a debate about ‘turf,’ as it is so often characterized,” Milner wrote in a letter to Dodd dated yesterday. “A single regulator as proposed creates greater opportunities for regulatory capture, further distances financial regulation from the public and would create conflicts that threaten the viability of state chartering and regulation.”

Council of Regulators

Dodd will also propose creating a Consumer Financial Protection Agency, a council of regulators to monitor large firms for disruptive effects on the industry and the economy, and giving the FDIC power to unwind failed firms whose collapse in bankruptcy could shake the economy, the person said.

The senator’s legislation will require that firms repay the government for the cost of unwinding large failed companies instead of having the industry prepay into a fund for such resolutions. Bair and Frank, a Massachusetts Democrat, support having companies prepay into a fund.

Dodd’s proposal for derivatives oversight may resemble Obama’s plan for reining in the $592 trillion over-the-counter derivatives market, the person said.

Obama proposed imposing higher margin and capital requirements on the market, requiring certain contracts to be processed through clearinghouses and mandating more disclosure requirements on derivatives dealers like JPMorgan Chase & Co. and Goldman Sachs Group Inc.

Staff members are still working on the proposal and the details may change, the person said.

No Compromise

Dodd, who is seeking re-election next year, will unveil his proposal after failing to reach a compromise with Senator Richard Shelby, the banking committee’s top Republican whose support would ease passage of the legislation in the Senate. Shelby of Alabama opposes setting up a standalone Consumer Financial Protection Agency.

Dodd’s measure aims to enact the plan Obama released in June for strengthening U.S. oversight of Wall Street to prevent a repeat of the worst financial crisis since the Great Depression. He said on Nov. 4 his committee will meet in the coming weeks to consider changes to his proposal and vote on it before sending it to the full Senate.

The House Financial Services Committee already approved legislation that would set up a consumer agency, tighten rules for derivatives and require federal oversight of hedge funds. Frank, a Massachusetts Democrat, has said he expects the full House to vote on his regulatory package this year.

The regulatory-overhaul legislation must be passed by the House and Senate and signed by the president to become law.