Disagreement within the Obama administration over reshaping U.S. financial regulation flared on Tuesday, with top bank regulators defending their turf against key parts of a plan to overhaul bank supervision.

The officials' defiance, voiced before the Senate Banking Committee, came despite a stern warning from Treasury Secretary Timothy Geithner on Friday about the need for administration officials to line up in support the White House's program.

In expletive-laced remarks at a private meeting, Geithner urged regulators to end turf battles and support President Barack Obama's plan, said a person familiar with the matter.

Discord within the administration, not to mention clashing viewpoints in Congress itself, signal a difficult road ahead this year for Obama's push to tighten oversight of banking and capital markets, spurred by the worst financial crisis in decades.

Without more agreement, it's hard to see how comprehensive financial regulation reform happens in 2009, said Joseph Engelhard, senior vice president at investment research firm Capital Alpha Partners, in Washington, D.C.

Congressional aides said the administration should have spent more time whipping its own troops into agreement before sending a financial reform package to Capitol Hill, especially with healthcare and climate change issues also in play.

Obama is calling for creating a national bank supervisor by merging the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). He wants to leave state bank supervision to the Federal Deposit Insurance Corporation and the Federal Reserve, although some lawmakers are discussing changes in this area, as well.

Geithner's persuasion session on Friday with top financial regulators seemed to have made little impression.

We do not support the administration's proposal to establish a new agency, the National Bank Supervisor, by eliminating the Office of the Comptroller of the Currency ... and the OTS, John Bowman, acting director of the OTS, told the banking committee.

The OTS does not support the provision in the administration's proposal to eliminate the thrift charter, he added.

FDIC Chairman Sheila Bair voiced support for merging OCC and OTS, but resisted more bank oversight centralization.

There is a profound risk of regulatory capture if you collapse it all into one agency, Bair said. We think having multiple voices can actually strengthen regulation.

1930s-ERA SYSTEM

With the economy in deep recession, the administration is trying to modernize a regulatory system set up largely in the 1930s, partly by consolidating duties now spread across many agencies. But the reform plan has met widespread resistance, not only from banks, but also from their government watchdogs.

Some might argue there's a bit of turf protection here. That's natural, said Democratic Senator Charles Schumer.

But he and Senate Banking Committee Chairman Christopher Dodd, both Democrats, said at the hearing that Congress and the administration should be looking at the big picture.

Our job here is not to protect regulators, Dodd said.

Do we really need three federal agencies to regulate banks? he said.

Senator Richard Shelby, the committee's top Republican, said, however, that regulators should not stop criticizing the administration's reform plans. He said he hoped regulators would not be swayed by Geithner's tirade. ... Your honesty and your candor are very important.

The White House plan would also create a Consumer Financial Protection Agency (CFPA) and charge the Fed with monitoring systemic risk in the economy, both major regulatory changes.

John Dugan, comptroller of the currency, said the Obama plan would give the Fed the right to override the views of other regulators on supervising very large banks, which would undermine the authority -- and the accountability -- of the banking supervisor.

LENGTHY DEBATE AHEAD

Comments like these marked a stiffening of regulators' opposition to portions of Obama's plan, which still faces many more months of debate in Congress.

At a tense, hour-long meeting on Friday, Geithner told Bair, Federal Reserve Chairman Ben Bernanke and the chairman of the Securities and Exchange Commission, Mary Schapiro, to end recent public criticism of the administration's plan and stop airing concerns over their potential loss of authority.

Treasury spokesman Andrew Williams said the Friday meeting was to tell regulators that we should work together to get reform done, and focus less on protecting turf.

If that message doesn't register and financial reform grinds to a halt later this year in the Senate as a single piece of legislation, it might be broken up, especially if other Obama reform efforts fizzle, Engelhard said.

If healthcare reform breaks down, I would say there's a greater than 50 percent chance that some element of financial regulation reform, such as derivatives reform, will pass in the Senate to show that the Obama administration is making progress, he said.

(Additional reporting by David Lawder and Karey Wutkowski in Washington, and Jonathan Stempel in New York; Editing by Leslie Adler)

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