Timothy Geithner, the US Treasury Secretary, has come out fighting on the first day of what is expected to be months of heated debate over President Barack Obama’s regulatory reforms.

In testimony to the Senate Banking Committee, the Treasury Secretary rebuffed criticism of the President’s plan for an increasingly powerful Federal Reserve to protect America from another financial crisis.

"If this crisis has taught us anything, it is that risk to our financial system can come from almost any quarter so we must be able to look in every corner and across the horizon for dangers," Mr Geithner told the Senate Banking Committee.

"Clearly, our current regulatory structure was not able to do that," he said.

President Obama laid out proposals to overhaul America’s patchwork of financial regulators on Wednesday. His proposals include handing responsibility to the central bank for monitoring against systemic risks and regulating companies deemed ‘too big to fail’.

A Financial Services Oversight Council, made up of representatives of the major financial regulators, will ensure that other risks do not fall in the gaps between watchdogs.

Lawmakers, critical of the Fed’s failure to prevent the recession and subsequent multibillion-dollar bailouts, were sceptical that the central bank could handle any additional responsibilities.

Richard Shelby, the senior Republican on the Senate Banking Committee, said that the White House had a "grossly inflated view of the Fed’s expertise".

"I do not believe that we can reasonably expect the Fed or any other agency to effectively play so many roles," the congressman said, noting that the bank already had responsibility for monetary policy and supervision of bank holding companies.

Dennis Kucinich, a Democrat congressman, said that the Fed’s handling of the financial crisis so far should be audited before it is given more power.

"Since August 2007 the Fed has intervened in the economy in an extraordinary way ... ballooning their balance sheet from $847 billion to more than $2 trillion," Mr Kucinich said. "Yet we still don’t know what the Fed has done or who got the money."

Some lawmakers would prefer the oversight council or a similar body to become the overarching regulator.

But Mr Geithner said: "You don’t convene a committee to put out a fire. The Federal Reserve is best positioned to play that role."

Mr Geithner, whose afternoon appearance to discuss regulation with the House Financial Services Committee was cancelled, denied that the Fed was being given too much power. He pointed out that some of the central bank’s responsibility for personal financial services would be transferred to a new Consumer Financial Protection Agency.

Ernest Patrikis, former first vice-president at the New York Federal Reserve, now a partner at White & Case, played down fears about the expansion of the Fed’s powers. "It’s far from clear to me that there’s going to be a huge number of parties that fall into the category of too big to fail," he said.

Mr Geither told the Senate committee that central banks around the world had some responsibility for systemic risk.

The Swiss National Bank on Wednesday called on the Swiss Government to give the central bank power to hive off parts of the country’s biggest banks if the economy worsened.

Last night, Mervyn King, Governor of the Bank of England, suggested that banks should not be allowed to grow so large that they were considered too big to fail – a point immediately rejected by Chancellor Alistair Darling.

The European Union leaders began a two-day meeting yesterday in which they will approve new rules to increase regulation of the banking sector, including the establishment of three pan-European monitors and a board to monitor systemic risks.

Banks around the world are increasing their capital ratios in line with new rules from the Basel Committee on Banking Supervision. But under President Obama’s proposals, a working group will reveal later this year even tougher capital rules for US banks.

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