WASHINGTON BUREAU – House Republicans may propose creating a market stability board that would lack authority over individual non-bank firms – and they also may propose narrowing Federal Reserve Board authority.

The proposed “market stability and capital adequacy board,” to be chaired by the Treasury secretary, would include outside experts as well as representatives from the financial regulatory agencies responsible for supervising large, complex firms. It would have the authority to monitor the interactions of various sectors of the financial system, and identify risks “that could endanger the stability and soundness of the system,” according to a document obtained by National Underwriter.

The document appears to be a draft of a House Republican regulatory reform alternative that is scheduled to be unveiled Thursday.

The Obama administration expects to unveil its reform proposal next week. Insurance industry lobbyists say they believe the administration will call for creating a federal systemic risk regulator that would have authority over insurers and other non-bank financial institutions.

In addition to creating a market stability board, the draft Republican reform proposal would give Congress veto power over Fed decisions to aid troubled companies — such as American International Group Inc., Washington — that are not banks.

The draft demands that “taxpayers are never again asked to pick up the tab for bad bets on Wall Street while some creditors and counterparties of failed firms are made whole.”

Insolvent firms should “be permitted to fail rather than become wards of the state,” the draft says.

Other draft provisions would:

- Establish a new chapter of the bankruptcy code to deal with resolving insolvent non-banks. Under the plan, bankruptcy judges would have the power to prevent runs on troubled institutions by staying claims by creditors and counterparties.

- Merge the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

- Strip the Fed of its current regulatory and supervisory authority, including the authority to oversee bank and financial holding companies, and transfer that power to the Federal Deposit Insurance Corp.

The draft calls for “refocusing” the Fed on its monetary policy mandate by relieving it of its current regulatory and supervisory authority, and by making it it more transparent and accountable to taxpayers.

The draft would narrow the Fed’s authority under Section 13(3) of the Federal Reserve Act, which currently provides the Fed with nearly unlimited powers during periods the Fed Board of Governors deems “unusual and exigent.”

Section 13(3) authority was the authority the Fed used to provide AIG with $85 billion in cash Sept. 15, 2008, in return for 79.9% of the company’s stock.

The draft would narrow Section 13(3) authority by requiring the Treasury Department to sign off on all Fed actions taken in connection with the Fed’s “unusual and exigent” authority.

Congress could block a Section 13(3) bailout by passing a resolution canceling the transaction within 90 days after the Fed offered the bailout.

The draft also would enable the U.S. Government Accountability Office to conduct more extensive audits of the Fed.

“In addition, to send clear signals to markets, the plan would require the Fed to have an explicit inflation target,” the draft says.