WASHINGTON — Sen. Christopher Dodd will cut a provision from his financial-regulation proposal that Federal Deposit Insurance Corp. Chairman Sheila Bair said could provide a “backdoor bailout” for failing companies.

Dodd, D-Conn., who leads the Senate Banking Committee, plans to remove language that would let the Federal Reserve lend directly to firms in emergency situations, his spokeswoman Kirstin Brost said Friday after Bair criticized the proposal in a Florida speech.

“There are provisions that would suggest that the Federal Reserve Board could support an open institution if it’s involved in payment processing or clearing facilities,” Bair told the Independent Community Bankers of America convention in Orlando, Fla., on Friday.

The Fed used the emergency authority to set up lending facilities for Bear Stearns Cos. and American International Group Inc. after credit markets froze in 2008. The Dodd proposal introduced March 15 would curb that power by permitting the Fed to lend in emergency situations only to the broad financial system, not to a single institution.

Dodd, who will begin weighing amendments to his draft Monday, will remove the provision faulted by Bair, Brost said in an e-mail. The House passed its version of the bill in December.

Dodd’s talks seeking compromise with Banking Committee Republicans ended without agreement on the powers of a new consumer protection unit within the Fed. In her speech, Bair continued her push for an independent Consumer Financial Protection Agency, a central goal of President Obama’s regulatory overhaul proposal.

“We need strong rules that apply and that are enforced across the board for banks and nonbanks,” Bair said.


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