What Will Bank Reform Ultimately Look Like?

Is Congress about to significantly change the powers of the Federal Reserve?

Testifying at a House hearing, Fed Chair Ben Bernanke waged a fresh battle against efforts to scale back his authority.

At issue are some 5,000 bank holding companies and 850 smaller banks that are state chartered yet members of the Federal Reserve - hence under Bernanke's jurisdiction.

In an effort to crack down on Wall Street, -- a bill led by led by Senate Banking Committee Chairman Christopher Dodd, (D-CT) -- would strip the Fed of its power to supervise state-chartered banks with assets of less than $50 billion.

That would leave the Fed with only 35 of the biggest bank holding companies under its supervision.

Bernanke argues the move would be harmful because the feedback he receives from the smaller banks is vital in decisions made to aid the economy.

With its narrower authority, the Fed's system of 12 regional banks could face profound changes. The Kansas City Federal Reserve Bank and the St. Louis Federal Reserve Bank, for instance, would have no banks under their supervision.

It’s worth noting that Senator Dodd's bill doesn't just take away power from the Fed, it also gives the Fed new powers to oversee nonbank financial firms that are so large and interconnected that their failure could pose a risk to the economy.

Such firms could include AIG or GE .

What must you know?

The Dodd bill will probably go nowhere in its current form, says Josh Rosner of Graham Fisher. But that doesn’t mean run out and establish a new position in your favorite bank. A lot of overhang remains in the sector and it will likely create a ceiling for most stocks.

If you’re looking for a play in this space, why not play the laggards, suggests Joe Terranova. I’d look at the exchanges, he says. Check out NYSE , ICE or Nasdaq.

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