WASHINGTON – Senate Democrats on Tuesday proposed stripping the Federal Reserve of its supervisory powers and creating instead three new federal agencies to police banks, protect consumers and dismantle failing institutions.

The 1,136-page bill, released by Senate Banking Committee Chairman Chris Dodd, would represent a significant shift in power in federal oversight of the U.S. market. The Fed has been a dominant figure in managing the economy, although many lawmakers blame the central bank for not doing enough to prevent last year’s crisis.

“We saw over the last number of years when (the Fed) took on consumer protection responsibilities and the regulation of bank holding companies, it was an abysmal failure,” said Dodd, a Connecticut Democrat.

Dodd’s proposal prompted cheers from consumer advocates and other Democrats, including Sen. Mark Warner, D-Va., an influential moderate who said swift action was necessary to prevent future government bailouts of big banks.

“Never again should the American taxpayers have to hear about ‘too big to fail,’ where the American taxpayer has to pick up the slack,” Warner said.

But the financial industry quickly pushed back, and Republicans were expected to oppose much of the bill.

The bill “would produce conflicts among regulators, undermine the state-chartered banking system, and impose extensive new regulatory burdens on those banks that had nothing to do with creating the financial crisis,” said Edward Yingling, president of the American Bankers Association.

Among the top points of contention is Dodd’s desire to create a Consumer Financial Protection Agency to protect consumers taking out home loans or using credit cards against predatory lending and surprise interest rate hikes.

Republicans and industry officials say that creating another bureaucracy will make it harder for banks to do business and would limit the availability of credit.

Other provisions in Dodd’s bill would:

 • Consolidate federal supervision of banks under a “Financial Institutions Regulatory Administration.”

 • Abolish the Office of the Comptroller of the Currency and the Office of Thrift Supervision, and strip the Federal Deposit Insurance Corp. and the Fed of their bank supervision duties.

 • Create an “Agency for Financial Stability” that would enforce new rules and dismantle complex financial firms if they threaten the broader economy.

 • Regulate privately traded derivatives, hedge funds and other private pools of capital so that regulators have a sense of how much risk is being assumed by financial firms.

 • Impose new rules on investment rating agencies.

 • Limit the Fed’s ability to provide emergency loans to mostly healthy institutions, instead of failing firms.

The Senate Banking Committee was expected to take up the legislation next week and vote by early December. Dodd said he expects to need Republican support to get the bill through Congress and that he remains optimistic.