Kansas City Federal Reserve Bank President Thomas Hoenig said on Thursday that stripping the central bank of its oversight of smaller banks was inconceivable and would hurt monetary policy.

Given the importance of 6,800 regional and community banks located in almost as many communities across this country, it is inconceivable to me that the central bank of the United States would not have a role in their oversight, he said in remarks for delivery to a banking industry conference.

He told the American Bankers Association meeting that the Fed's supervisory role provided it with critical information that supported the Fed's role in guiding the economy.

Under a proposal unveiled by Senator Christopher Dodd on Monday, the Fed would be put in charge of overseeing banks and important financial firms with assets greater than $50 billion.

But it would lose its regulatory authority over thousands of smaller banks it now supervises, which would be overseen by the Federal Deposit Insurance Corp or the Office of the Comptroller of the Currency.

That loss of responsibility would be felt deeply on the Kansas City Fed and 10 other regional Fed banks, while the purview of the New York Fed and Fed's Washington board could grow.

Fed Chairman Ben Bernanke on Wednesday offered an argument that mirrored Hoenig's, telling lawmakers the Fed's oversight of smaller banks increased the effectiveness of monetary policy.

Hoenig told the bankers' group the vocal opposition from the Fed was not driven by the idea of simply protecting our 'turf', but instead was driven by a desire to serve the best interests of the nation.

(Reporting by Tim Ahmann; Editing by Padraic Cassidy)

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