As the Senate Banking Committee hashes out its differences on financial regulatory reform, the creation (or not) of a Consumer Financial Protection Agency (CFPA) is the main focal point. But it isn’t the only issue left to be worked out.

Yesterday, the Obama administration officially submitted to Congress its proposal to implement the “Volcker rule,” which would bar banks from trading for their own benefits with federally insured deposits. The administration would also like to forbid any financial institution from owning more than 10 percent of the market share in the financial system (minus insured deposits). But the proposal seems to be going nowhere fast in the Senate:

– Sen. Chris Dodd (D-CT): I can’t write regulations, this is way beyond the competency of Congress.

– Sen. Bob Corker (R-TN): It is not helpful to the process for the administration to be putting out positions right now on financial regs, especially as it relates to the Volcker rule. It’s just not helpful.

While the Senate seems to have nothing but cool indifference toward the Volcker rule, others are not so dismissive. Rep. Paul Kanjorski (D-PA) called it a “fair, practical and foresighted proposal.” Five former Treasury Secretaries support the rule, saying that it’s “a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities.” Former Citigroup CEO John Reed has endorsed it, saying that it would “limit the propogation of [bank] failures.”

Today, Citigroup’s current CEO, Vikram Pandit, also endorsed a separation between risky trading and commercial banking, saying that “banks should operate as banks, focused completely on serving their clients.” “I don’t believe banks should use capital to speculate that way,” Pandit said, when asked about the kind of trading the Volcker rule is meant to curb. Of course, Citigroup stands to benefit from the implementation of the rule, as it has already ditched many parts of the company that engaged in risky behavior, but still, Pandit is the first current CEO of a megabank to explicitly back the rule.

By not giving the Volcker rule much thought, the Senate is showing some short-sightedness and limiting itself to a reform bill that only aims to correct the problems of the last financial crisis. But now that all the big investment banks have converted into bank holding companies, they receive federal guarantees and cheap loans, while still engaging in the same trading practices as before the crisis. That means additional safeguards to correct potential problems with this setup are in order.

So as Paul Volcker himself said when questioned by Sen. Mike Johanns (R-NE), “I tell you, sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you.”

Sen. Bob Corker (R-TN) said yesterday that the Senate Banking Committee is “real close” to completing a regulatory reform bill, after a series of proposals went back and forth between Corker and committee chairman Chris Dodd (D-CT) regarding consumer protection. Instead of creating a new Consumer Financial Protection Agency (CFPA), Corker and Dodd are looking at placing a consumer protection division inside of the Federal Reserve (even though Dodd previously said that the Fed was “an abysmal failure” when it came to protecting consumers from deceptive lending).

Several Democrats have expressed skepticism with “the Fed option,” citing the central bank’s long history of neglecting consumers and ignoring warnings about pernicious bank behavior. But Republicans not only want to house the consumer protection division within the Fed. They also want to give the Fed Chairman veto authority over new consumer protection rules:

Senate Republicans had put forth a revised plan that Sen. Bob Corker of Tennessee had earlier offered, but with the support of Banking ranking member Richard Shelby and Sen. Judd Gregg, R-N.H. The plan is a modified version of one that would house the agency in the Federal Reserve, according to a knowledgeable source, but would give the Fed chairman the power on any sign-off for rule-writing, a provision needed to pick up Gregg’s support.

Incidentally, placing consumer protection within the Fed is the preferred choice of the banking industry.

It’s no surprise that Gregg is advocating for a stronger Fed role, as he has been one of the central bank’s staunchest defenders. But for Shelby to be running with this proposal is quite the turnaround, as just a few months ago he was one of the most vocal opponents of the nomination of Federal Reserve Chairman Ben Bernanke.

At the time, Shelby said that the Fed “fiddled while our markets burned,” and that its “poor oversight of our financial institutions and markets helped produce the greatest economic crisis this country has experienced in eighty years.” So has he changed his mind, or does he hold consumer protection in such low regard that he’s willing to leave it to an entity that he considers inept?

Meanwhile, even more senators have come out against the Fed option. Sen. Byron Dorgan (D-ND) said “it’s a horrible idea. It’s a terrible idea. I don’t support it and I’ll try to change it.” Sen. Bernie Sanders (I-VT) added that “consumers need real, real, real protection.” Indeed, giving the Fed’s bank regulators an effective veto over any new consumer rules leaves us with a system that looks exactly like the status quo, in which consumer protection is subservient to bank “safety and soundness” across the regulatory framework.

Sen. Chuck Grassley (R-IA) bluntly summed up what the Republicans are trying to do, saying yesterday that “there will be a bill, but it will be very much cut back from what the House passed.” And that seems to be where the bill is headed: “very much cut back” with very little justification as to why.