The Federal Reserve on Thursday won another battle to maintain its independence as lawmakers crafting a final Wall Street reform bill dropped a plan to make one of its top officials a political appointee.

The U.S. central bank, whose authority some lawmakers had wanted to rein in amid wide criticism for lax oversight before the 2007-2009 financial crisis, will actually see its powers increase under the sweeping overhaul of financial regulation.

Lawmakers on the joint committee of the House of Representatives and Senate dropped a proposal to require the U.S. president to appoint the head of the Federal Reserve Bank of New York, rather than its board of directors, as they worked to resolve separate bills passed by the two chambers.

However, they decided to prevent bankers on regional Fed bank boards from participating in the selection of their Fed bank chief.

Many lawmakers had accused the Fed of being too cozy with the banks it oversees. But those shaping the final bill said the central bank's independence would have been compromised if the key position was made political.

I don't want to in any way imply to the American people or the international markets that these decisions on monetary policy are going to be influenced by the politics of the day, said Republican Senator Judd Gregg.

The broadest rewrite of Wall Street rules since the 1930s would establish new consumer protections, crimp big banks' profits and saddle the industry with tighter regulations in a bid to avoid a repeat of the financial crisis, which sparked the worst U.S. recession in generations.

With congressional elections looming in November, Democrats aim to harness widespread anger at Wall Street and iron out the differences between the House and Senate bills by June 24.

That would give President Barack Obama an example for other world leaders to follow at a summit of leaders of the Group of 20 industrialized and developing economies in Toronto, which starts on June 26. Europe is aiming to tackle similar reforms, but the United States is far ahead.

DEALING WITH TROUBLED FIRMS

A central element of the bill would give regulators clear authority to seize unstable financial firms before they threaten the economy in an effort to avoid a repeat of the recent crisis.

Negotiators will have to resolve a standoff over whether the financial industry should have to pay for the process in advance or after a firm runs into trouble. Lawmakers, however, agree that banks, not taxpayers, should foot the bill next time.

Congress, under pressure from regulators, had authorized $700 billion in funding during the crisis to bail out Wall Street firms, spurring widespread voter anger.

Regulators did not take a consistent approach to troubled firms during the crisis. They provided $182 billion to bail out insurer American International Group while they let Lehman Brothers declare bankruptcy and steered investment banks Bear Stearns and Merrill Lynch into mergers with other firms.

A bill passed by the House in December would set up a $150 billion fund to cover costs for liquidating troubled financial firms, paid for by firms with more than $50 billion in assets.

The Senate bill, passed last month, would cover those costs by selling off the troubled firm's assets. Other firms would have to chip in if the asset sales didn't cover the bill.

The banking industry does not want to pay any fees up front.

Behind the scenes, Democrats were also looking for a way to ease concerns about a controversial proposal to limit banks' risky trading activities. The latest plan would tighten Federal Reserve rules to ensure that banks would keep lucrative swap-dealing desks sufficiently separated from core bank operations.

House Democrats also plan to push for a requirement that large banks cannot be leveraged by more than a 15-to-1 ratio, and want to kill a proposal that would require secured creditors to accept some losses when a bank fails.

In negotiations so far, lawmakers have stopped short of their most aggressive proposals.

They dropped a proposal to examine the Fed's interest-rate decisions. They also postponed a plan that would have upended the credit-rating business by installing a clearinghouse between debt issuers and the agencies that rate their offerings.

The committee next week is scheduled to tackle consumer-protection plans and whether to limit fees on debit-card transactions, as well as the proposal on limiting risky trading.

Once a final bill is agreed, it must be approved by the full House and Senate before Obama can sign it into law.

(Additional reporting by Kevin Drawbaugh and Kim Dixon; Editing by Leslie Adler)

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