In what seems to be a political move to build up his political capital after being perceived as too friendly with the major banks, Senate Banking Committee Chairman Christopher Dodd (D., Conn.), has been preparing legislation which would dramatically change how the banking system in the U.S. would be supervised.

But opposition has already been mounting for some time against his proposal to create a new agency which would be tasked with overseeing the banks and their holding companies, effectively and dramatically removing much authority from the Federal Deposit Insurance Corp. (FDIC) and the Federal Reserve.

What would emerge would a a circle of regulators which would in turn be supervised by what Dodd is calling an independent White House appointee. Together the would track potential or emerging risks to the banking system.

Predictably, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair have reacted strongly to their power being undermined, and are battling to retain their authority and status, which would obviously diminish under the new agency.

Bair has argued that a plurality of regulators would be the best way to protect the financial system, although under the current circumstances that’s a somewhat hollow argument, seeing how they failed completely in identifying and dealing with the economic crisis that exploded upon the U.S. and the world.

Under the plan of Dodd, the FDIC would continue to be the agency which would insure consumers’ deposits and still oversee the failure of banks. There is also the additional job under the bill which would have the FDIC overseeing the dissolving of banks and financial institutions which are on the verge of failure.

As far as Federal Reserve chairman Ben Bernanke, he asserts the agency would have difficulty operating monetary policy in an effective way without retaining its supervisory powers.

Under Dodd’s plan, the Fed evidently would continue in its role as “lender of last resort” while being removed from its supervisory role with bank-holding companies and banks. Representatives of the Fed would be “allowed” to attend meetings where the new agency would examine the various banks and their condition. The stated reason would be so they could keep in touch with the overall condition of the industry. You know that has to infuriate Bernanke and the heads of regional Federal Reserve banks.  Those 12 regional banks could even be shut down under the new rules. Creating and enforcing of consumer-protection guidelines would also be removed from the venue of the Fed under the Dodd law. In other words, the role for the Federal Reserve under Dodd’s proposal would be to primarily to formulate monetary policy.

Powerful opponents have already lined up against Dodd’s legislation, including the banking industry, Senate Republicans, Barney Frank and the Obama administration.

Another major problem is the highly-favored legislation of bill H.R. 1207, introduced by Ron Paul, is being lost in the mix, and that’s a shame as it would be one of the real pieces of legislation which would have made significant impact on the long-term problems associated with the Federal Reserve. The bill, which was recently gutted of its teeth, will be reintroduced by Ron Paul in its original wording and emphasis, and calls for a full and complete audit of the Federal Reserve in all its dealings, not just the crumbs it leaves on the table.

For Dodd, this is political expediency, and, again, positions himself as one battling the powerful bankers, rather than the soft approaches towards them he has been practicing in the past.