The Obama administration reasserted its commitment to banning proprietary trading by banks with draft legislative language on Wednesday, despite signs that the U.S. Congress is unlikely to adopt such a rule.

In a scant five pages from the Treasury Department, the administration put a two-year phase-in on its Volcker rule to curb prop trading -- or buying and selling of investments on financiers' own books unrelated to customer needs.

The rule would apply to banks, with limits slapped on large, non-bank financial firms, as well. In addition, banks would be barred from sponsoring or investing in hedge funds and private equity funds, under the administration's language.

While key details were left up to regulators, the language showed the White House is determined to push ahead with a rule it first proposed in January, as the U.S. Senate inched its way toward acting on new financial reform legislation.

Authored chiefly by White House economic adviser Paul Volcker, the rule arrived late in a reform debate that has raged for months since the severe 2008-2009 financial crisis tipped the U.S. economy into a deep recession.

President Barack Obama in mid-2009 proposed a comprehensive package of reforms aimed at preventing another crisis. Most of them were embraced in a bill approved in December by the House of Representatives, but the Volcker rule was not in the mix.

By the time Obama and Volcker unveiled it almost six weeks ago, the Senate was well along in its debate about reforms. The Volcker rule complicated Senate Banking Committee Chairman Christopher Dodd's task of moving a reform bill to the Senate floor, and he has still not managed to do that.

Amid ferocious lobbying by banks and Wall Street firms opposed to reforms, Republicans have pushed the Senate toward a narrower, compromise bill that looks likely to exclude the Volcker rule and other key Obama proposals.

SHELBY OPEN ON WATCHDOG IN FED-SOURCES

In a potential breakthrough on Capitol Hill, sources said a senior Republican is open to making a new government watchdog for financial consumers a division of the Federal Reserve.

Senator Richard Shelby was said to be willing to explore the so-called Fed option being promoted by Dodd as a possible compromise on the watchdog first proposed last year by Obama. (For a story on Shelby's position, double-click on [ID:nN03110377])

The sources said Shelby was proposing the idea along with giving less independence to the consumer watchdog.

For weeks now, the watchdog has been an obstacle to cutting a bipartisan deal in the Senate on financial reform, one of the White House's highest domestic policy priorities.

December's House bill included an independent consumer watchdog agency, as Obama proposed, but Republicans oppose this and their greater clout in the Senate has been decisive.

Even if Dodd and Shelby, the banking committee's top Republican, agree to a bill in which the watchdog is relegated to a Fed division, that aspect of the bill could face intense opposition on the Senate floor from senior Democrats.

Treasury Secretary Timothy Geithner said on Wednesday he would not accept reforms that failed to protect financial consumers. But his remarks at a meeting with consumer groups, perhaps in a significant omission, did not specifically say the watchdog must be a stand-alone agency.

TOP DEMS HIT PUTTING WATCHDOG IN FED

Senior Democrats in Congress on Tuesday sharply criticized the idea of putting the watchdog -- designed to shield Americans from abusive mortgages, deceptive credit cards and other dodgy financial products -- inside the Fed.

Representative Barney Frank, chief architect of reform in the House, told Reuters he thought it was a joke when he learned about the approach being eyed in the Senate.

Frank said on Wednesday, however, that he could, if necessary, support putting the watchdog in the Treasury Department, an earlier Dodd proposal rejected by Republicans.

Billionaire financier George Soros said in New York on Wednesday that a consumer protection agency is urgently needed, but he called putting it in the Fed absolutely unacceptable.

Dodd and Republican Senator Bob Corker, a first-term banking committee member, on Wednesday were near a final deal on revised legislation, with Shelby involved in the talks, according to sources familiar with the talks.

Lobbying groups for large banks sent a letter to lawmakers on Wednesday saying that the Fed should retain its role as the supervisor of large bank holding companies, such as Citigroup and Bank of America .

Despite sharp criticism leveled at the U.S. central bank over its failures as a bank supervisor before the crisis, the approach backed by the lobbyists also will likely be included in the Dodd bill, said lawmakers, aides and lobbyists.

They said another component of the deal calls for forming a hybrid resolution fund for financing the dismantling of large financial firms that get into trouble.

Some money for the fund would be fronted by large firms, held by the Federal Deposit Insurance Corp, and invested in Treasury securities that banks could keep on their balance sheets, with insurance companies partly exempt, they said.

(Reporting by Kevin Drawbaugh and Karey Wutkowski)

(Additional reporting by Rachelle Younglai and Caren Bohan)

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