Admin wants Fed to oversee "systemic risk": sources

By Kevin Drawbaugh and Rachelle Younglai

WASHINGTON (Reuters) - The Obama administration is expected to propose legislation by June calling for the U.S. Federal Reserve to play a central role in regulating systemic risk in the economy, trade association sources said on Friday.

Now that the U.S. bank stress tests are over, the administration is refocusing on a drive to tighten regulation of banks and markets to prevent another financial crisis like the one that is currently ravaging economies worldwide.

Systemic risk refers to problems in the financial system large enough to damage the overall economy. For instance, the government last year bailed out insurer American International Group because its failure was seen as a systemic risk.

Beyond that, there is little agreement among officials about the much-debated idea of setting up a government regulator to monitor and manage systemic risk.

The administration left the door open to further discussion in remarks by a Treasury Department spokesman.

Treasury Secretary Timothy Geithner is open to the possibility of a council to coordinate among bank regulators, including the agency overseeing the stability of the system as a whole, the spokesman told Reuters on Friday.

"Secretary Geithner believes that we need a single independent regulator with responsibility for systemically important firms and critical payment and settlement systems," spokesman Andrew Williams said.

"He does see a role, however, for a council to coordinate among the various regulators, including the systemic risk regulator," Williams added.