An Obama administration proposal to create a government watchdog for financial consumers inched forward in Congress on Wednesday, with House Financial Services Chairman Barney Frank calling for death panels to close down troubled financial firms.

Treasury Secretary Timothy Geithner, at a hearing chaired by Frank, urged lawmakers to approve the proposed Consumer Financial Protection Agency.

But he also signaled support for paring back the CFPA's scope and scale in ways that could help overcome fierce opposition to it and improve its chances of passage.

A dedicated, consolidated consumer protection agency is needed to fix a scattered system that failed consumers in the global financial crisis that started last year, Geithner said at a House of Representatives Financial Services Committee hearing.

He expressed support for moderating changes to the administration's CFPA proposal put forward by Frank, the Democratic chairman of the committee.

The broad thrust of those proposals look very encouraging and promising to us. And there's nothing in there, at first glance, that troubles me significantly, Geithner said.

The CFPA would be a central overseer of consumer protection laws that are now vested in several agencies, including the Federal Reserve, criticized for their past performance.

Frank said existing regulators' record was abysmal.

Underlining popular opposition to further government-funded bailouts, Frank added: There will be death panels enacted by this Congress, but they will be for non-bank financial institutions that will not be considered too big to die.

Frank, known for his acerbic wit, made the remark in connection with a proposed resolution authority that would give the government a new way to deal with troubled non-bank financial institutions whose failure could hurt the economy.

His comment revealed that Frank, for one, views resolution more like a firing squad than a rescue mission.

We have this euphemism that we are going to be resolving these institutions ... We are talking about dissolution, not resolution, Frank said. We are talking about making it unpleasant for the entities.

PUZZLE PIECE

The CFPA is the next piece of President Barack Obama's complex financial reform puzzle to gain headway in Congress.

Credit card reform has been accomplished. A restructuring of the troubled $92-billion student loan market is close to Senate consideration, having already won House approval.

More difficult pieces still await action, such as creating the resolution authority and a systemic risk regulator; cracking down on over-the-counter derivatives; and regulating other areas of high finance that last year ran off the rails.

The hearing marked the outset of an intense push in coming weeks by the committee on financial reform, starting with CFPA. Frank said he expects a House vote on legislation in November.

Banks and Republicans opposing CFPA have said it would only entangle businesses in more government red tape.

Representative Spencer Bachus, the committee's top Republican, said it would be a massive new government bureaucracy ... which consumers will ultimately pay for.

Existing bank regulators, who would lose authority under the CFPA proposal if it were adopted, also questioned it.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, said her agency should continue protecting customers.

We don't want to lose that. If you want to call that turf, that's fine, she said at the hearing.

Seeking to improve the CFPA's chances for passage, Frank wants to kill a controversial part of the plan -- a provision that would force banks to offer so-called plain vanilla versions of financial products, such as mortgages.

In draft legislative language obtained by Reuters, Frank also is calling for exempting a wide range of businesses from CFPA oversight, such as accountants, lawyers, securities, commodities and investment and general insurance products.

RULE WRITING AND ENFORCEMENT

Lawmakers have debated whether the CFPA should be able to both write and enforce consumer protection rules.

Drawing a firm line, Geithner said separating those powers would risk creating an agency that is weak and ill-informed.

Another issue raised in the CFPA debate is whether state governments could adopt and enforce even stricter rules. That issue still has to be dealt with and debated, Frank said.

Obama said on Wednesday that financial regulation needs strengthening to end the greed, excess and abuse that caused the financial crisis, the worst in generations.

Regulatory reform will headline this week's meeting of the Group of 20 economic powerhouse countries in Pittsburgh, to be attended by Obama and other world leaders.

Obama's reform agenda in recent months has bogged down in Congress, with lawmakers still far apart on central issues and distracted by other topics such as healthcare reform, even as markets bounce back and the economy show signs of recovery.

We can't let the momentum for reform fade as the memory of the crisis recedes, Geithner told the committee.

(Additional reporting by David Lawder and Karey Wutkowski; Editing by Simon Denyer and Dan Grebler)

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