Senate deal reached on state preemption: aides

WASHINGTON (Reuters) - In a move that could clear away a long-standing obstacle to passage of a landmark Wall Street reform bill in the U.S. Senate, key senators have reached a compromise on the balance of power between state and federal officials on bank oversight, aides said on Tuesday.

Democratic Senator Thomas Carper will unveil an amendment later on Tuesday dealing with the issue, an aide said.

Carper and other lawmakers have reached an agreement with Senate Banking Committee Chairman Christopher Dodd, author of the wider reform bill, that gives state attorneys general more power on consumer protection laws but moderates some earlier language in Dodd's legislation, a second Senate aide said.

Dodd said on the Senate floor that votes on the matter would be held in the afternoon.

Consumer advocates have been pushing to give state authorities more power to protect consumers, arguing that federal regulators have done a poor job of it in recent years and that states are often more aggressive on such matters.

The Dodd bill originally called for reining in the power of the U.S. Office of the Comptroller of the Currency, a federal agency that supervises large national banks, to preempt, or overrule, state consumer protection laws.

Lobbyists for large banks with nationwide operations have been intensely focused for months on this issue, pushing to preserve the status quo on state preemption and weaken the Dodd bill's proposals that would give state officials more clout.

Under the compromise, an aide said, the Dodd bill would still restrain the OCC's sway on preemption, but to a slightly lesser degree than earlier proposed.

In addition, the Dodd bill calls for establishing a new financial consumer protection watchdog within the Federal Reserve. Banks have also been working hard to put checks on the watchdog's powers and states' power to enforce its rules.

In the compromise, the aide said, state attorneys general would get more power to sue banks under the watchdog's consumer protection laws, but would not have the full statutory power given to the watchdog itself.

"It is yet to be seen how some of the liberals in the Democratic caucus will react, but these negotiations are a positive sign for an issue that had seen little movement in the past several weeks," said policy analyst Paul Miller at FBR Capital Markets in a research note.

(Additional reporting by Andy Sullivan; Editing by Dan Grebler)