By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) -- Responding to the financial crisis that rattled the financial world in 2008, a key Senate committee is expected to take up sweeping bank reform legislation later this month, taking the baton from the House, which approved new post-credit crunch rules for financial institutions last month.

However, before the Senate Banking Committee begins to vote on provisions to attach to a mammoth bank reform bill introduced in November, committee chairman Christopher Dodd, D-Conn., is in negotiations to morph it into bipartisan legislation with Sen. Richard Shelby, R-Ala., the panel's ranking member.

Dodd spokeswoman Justine Sessions said the two agree on many provisions. Nevertheless, observers contend that the two are still far apart on key measures. Read Dodd's bill here.

Ed Mierzwinski, consumer program director with U.S. Public Interest Research Group in Washington, points out that Shelby has major issues with Dodd's proposal to create an independent Consumer Financial Protection Agency, charged with writing rules for mortgage and credit card products in the wake of the credit crunch and financial crisis.

Led by House Financial Services Committee Chairman Barney Frank, the House approved the creation of an independent CFPA, with no support from GOP lawmakers.

"We have been urging Shelby to enact an independent CFPA and we are hopeful that an independent CFPA will be part of the final legislation," Mierzwinski said.

As it stands, the mammoth legislative package introduced by Dodd includes new consumer protections, additional leverage and other restrictions on too-big-to-fail banks. The committee could begin voting on the legislation as early as the week of Jan. 11 but it is more likely to wait until after Jan. 20.

"We are hopeful to have bank reform legislation with a CFPA approved by April because after that the legislative timeline slows dramatically as legislative season becomes campaign season," Mierzwinski said.

There are significant differences between the House and Senate bills under consideration. Both bills create a consumer agency; however the House measure exempts independent motor vehicle dealers from its oversight while small banks are excluded from CFPA on-site examinations.

House lawmakers narrowly defeated an effort led by Rep. Walt Minnick, D-Idaho, to destroy the proposed CFPA and replace it with a weaker council. Mierzwinski said he worries that similar efforts to weaken or dismantle the proposed agency could be approved in the Senate.

Conservatives are seeking to have the committee eliminate the consumer agency and replace it with a council that would be based on the legislation rejected in the House. Another compromise alternative sought by the GOP would allow the CFPA to write consumer protection rules, but eliminate its law enforcement authority, which would remain with existing bank regulators.

"Alternatives to a single entity CFPA include a Minnick-like council of the functional regulators' consumer protection officers, or possibly the idea of having a single agency with rule-writing authority, while enforcement and onsite exams would remain with the functional regulators," said Financial Services Forum vice president John Dearie.

The House bill includes new up-front 'too-big-to-fail' fees on big banks to create a systemic fund to unwind a failing mega-institution so it doesn't unsettle the markets, while the Dodd legislation would have taxpayers foot the bill to dismantle such an entity before it is recouped from big banks.

"We are very much in favor of resolution authority," Dearie said. "The legal authority and procedural framework must be created to wind down any financial institution, no matter how large or complex. That is the solution to 'too-big-to-fail.'"

A major point of contention relates to the power of the Federal Reserve in the new regulatory world.

The House bill combines the Office of Thrift Supervision and the Office of the Comptroller of the Currency, while the Dodd legislation would create a consolidated regulator made up of all bank regulators, which would strip the central bank of its regulatory authority to supervise banks. That authority would be placed within the new systemic regulator.

"Dodd and Shelby agree that the Fed should be cut down in power," Mierzwinski said. "They are in discussions about how much of the Fed power will be reduced."

The Dodd bill would also strip the Federal Deposit Insurance Corp. of its oversight and regulatory authority over banks while granting the agency with a new responsibility to oversee the dismantling of a failed financial institution so it doesn't cause collateral damage to the markets.

The House bill maintains the FDIC's existing authorities, partly in response to concerns raised by many small banks that worry its consolidation into a mega-regulator would mean their interests would become secondary to those of big banks.

A large number of small banks are regulated under the so called 'duel-banking' system, which means they can be state-chartered or federally chartered. Many small banks are examined by both the FDIC or the Fed and their state regulator. Under Dodd's bill, the new consolidated bank regulator would maintain a community bank office to look out for the interests of small banks.

"Consolidating Federal banking regulators would not damage the dual-banking system because the option of state regulation wouldn't be effected," Dearie said.

It is likely that the Fed's monetary policy division would be kept separate from the larger bank regulator as part of a final Dodd-Shelby proposal.

"We agree that the Federal Reserve should be more focused on its core responsibility--conducting monetary policy," the two senators said in a joint-statement in late December.

The House bill also caps the debt-to-equity leverage at the largest banks at 15-to-1, a provision that would significantly limit the growth of big banks as the economy recovers. Meanwhile, the Dodd bill charges a new mega-bank regulator, dubbed the financial institution regulatory administration, to approve leverage limits for big banks.

The House bill also permits bank regulators to break up big banks but does not require them to do so, while Dodd's bill does not grant that authority.