WASHINGTON (Reuters) - A U.S. Democratic lawmaker and top bank regulator on Monday defended legislative efforts that they say would end the perception that some firms are "too big to fail," challenging Republican complaints about the financial reform bills.
The defence of the financial regulation overhaul moving through Congress comes as lawmakers are in the middle of a two-week recess. When they return next week, financial reform is expected to be the top legislative priority.
Before the recess started, Richard Shelby, the top Republican on the Senate Banking Committee, said a Democratic bill approved by the panel failed to end the "too big to fail" problem.
Representative Paul Kanjorski, a leading Democrat on the House Financial Services Committee, said on Monday the House bill would ensure no firm poses too much risk by giving regulators the power to proactively limit products or break up large financial firms, even before they get into trouble.
He predicted the Senate version would soon have a similar provision.
Also on Monday, Federal Deposit Insurance Corp Chairman Sheila Bair challenged opponents of the financial reform effort, saying that the bills give the FDIC the power it needs to orderly dismantle large failing firms.
She said "too big to fail" still exists today, giving large firms a funding advantage, and reform is needed quickly to end it.
"Misinformed criticisms of the legislation that simply serve to politicize, obfuscate or delay enactment will only perpetuate the favourable market funding these firms receive from their implicit government backing," Bair said in an editorial in the Wall Street Journal.
BIPARTISAN HOPE STILL ALIVE
Financial reform is a politically sensitive topic with Democrats trying to pass strict new rules that could constrain financial firms' profit potential by limiting their risk-taking.
The rules would also give regulators the power to dismantle failing firms instead of crafting massive bailouts like the one for insurer AIG (AIG.N), or facing the severe market disruption
that followed the collapse of Lehman Brothers LEHMQ.PK.
Republicans have been trying to water down the provisions -- particularly the creation of a powerful, independent agency to police financial products -- but are still working with Democrats on the bill.
The Senate Banking Committee last month approved a bill by 13-10 party-line vote that was drafted by its Democratic chairman, Senator Christopher Dodd. The vote came after Dodd and Shelby had failed to work out a compromise measure.
The full Senate will begin debating the bill after the recess. If it passes the measure, the Senate and House will go to conference to reconcile their versions of the bill.
The White House is hoping the recent passage of healthcare reform, a top domestic priority, will give momentum to financial reform and allow it to get passed before it gets bogged down in campaigns for the mid-term elections in November.
Kanjorski, in an interview with CNBC Television, said on Monday that he believes reform can get passed by the end of May.
He also held out hope that, unlike healthcare, Congress would be able to produce a bipartisan bill.
"I see there are some strong differences of opinion on the two sides. I think they're able to be reconciled," Kanjorski said.
(Reporting by Karey Wutkowski, editing by Dave Zimmerman)