Both winners and losers in Dodd’s departure?

The news that Sen. Christopher Dodd of Connecticut will not seek re-election this fall is a welcome development for both the nation’s most powerful banking regulator, Federal Reserve Chairman Ben Bernanke, and its toughest, Federal Deposit Insurance Corp. Chief Sheila Bair.

That’s because Mr. Dodd, chairman of the Senate Banking Committee, in November introduced a major financial reform bill whose provisions included stripping the Fed and FDIC of most of their power to oversee banks. He also proposed replacing two other major banking regulators, the Treasury Department’s Office of the Comptroller of the Currency and its Office of Thrift Supervision, with a single authority that would be officially independent of the Treasury Secretary.

Mr. Dodd argued at the time that the changes were needed to allow the Fed to focus on setting interest rates without “being distracted by responsibilities for bank oversight and consumer protections,” while holding the FDIC to its core mission of insuring deposits and winding down failed banks. The consolidation of agencies into a new entity would also prevent financial institutions from shopping for the weakest regulator.

But those ideas—and others involving financial services regulation in the wake of the credit crisis—are in flux now that Mr. Dodd has said he plans to exit the Senate stage.

Indeed, Mr. Dodd’s announcement may well strengthen the hand of Rep. Barney Frank, whose own financial regulation bill was approved last month by the House of Representatives.

Mr. Frank’s bill would dramatically expand the Fed’s authority by allowing it to pump up to $4 trillion in credit into the financial system during a crisis, or about twice as much as it has injected into banks so far in the current one. The Massachusetts Democrat’s bill also would heighten the FDIC’s power by, among other things, creating a $200 billion “dissolution fund” for insolvent banks that the agency would draw from banks and the Treasury.

Mr. Frank’s bill proposes to eliminate just one agency, the much-maligned Office of Thrift Supervision. So presumably folks at the Office of the Comptroller of the Currency, a division of the Treasury Department that regulates national banks, are breathing a bit easier with Mr. Dodd’s announcement.

Some lobbyists wonder if Mr. Dodd’s lame-duck status means he will attempt to make financial reform less consumer-focused as a reward to his long-time supporters in his home state’s many insurance companies and hedge funds. However, Mr. Dodd’s bill shares one important feature with Mr. Frank’s: The creation of a new Consumer Financial Protection Agency, something the banking industry bitterly opposes.

“It will free him to do what he wants,” said one lobbyist, “but I don’t know what’s in his heart.”

Barbara Roper, director of investor protection at the Consumer Federation of America, said that as financial reform legislation trudges forward, she hopes Mr. Dodd would be less susceptible to pressure from banks or political opponents now that he no longer has to finance another campaign or win another election. She added, however, that she could understand arguments that precisely the opposite would happen.

“Financial reform is the most significant legislation of his long career,” Ms. Roper said, “it will be his legacy.”

[This story was first published in Crain’s New York, a sister publication to InvestmentNews.]