The US Federal Reserve yesterday pushed back against congressional moves to strip it of its oversight over small banks.

Monetary policy and financial stability would be damaged if the central bank's regulatory role were reduced, the Fed chairman and one of his prominent predecessors told a congressional committee.

Ben Bernanke said supervision of state banks “provides useful information about the economy and financial conditions throughout the nation” that “greatly assists in the making of monetary policy”.

“Not only in this crisis, but also in episodes such as the 1987 stock market crash and the terrorist attacks of September 11, 2001, the Federal Reserve's supervisory role was essential for it to contain threats to financial stability,” he argued.

Paul Volcker, the former Fed chairman and adviser to Barack Obama, president, said it would be a “really grievous mistake” to withdraw the Fed's oversight of the largest systemically important companies.

The hearing in the House financial services committee was intended to press Chris Dodd, chairman of the Senate banking committee, after he proposed in November moving all of the Fed's supervision responsibilities over 5,000 bank holding companies and 850 state-chartered banks to a single bank regulator.

Mr Dodd believed that would establish a clearer regulatory system and prevent banks from looking for the most lax supervisor – so-called “regulatory arbitrage”. But Barney Frank, chairman of the House committee, the Treasury and the Fed pushed for the central bank to retain oversight over large companies.

Mr Dodd has since offered a compromise in the new regulatory reform bill presented this week, which allows the Fed to stay as the supervisor for banks with over $50bn (€36.31bn, £32.57bn) in assets, while smaller state-chartered institutions would be regulated by the Federal Deposit Insurance Corporation.