The Federal Reserve and Treasury are playing a dominant day-to-day role in overseeing Wall Street following this week’s rescue of Bear Stearns, raising the prospect that the central bank might be given more permanent authority over securities firms.

Bankers say the greater authority is a direct consequence of the Fed’s extraordinary decisions to extend a $30bn credit line to help JPMorgan Chase’s takeover of Bear and to lend emergency funds to securities houses for the first time in more than 70 years.

“There is a new sheriff in town,” said a senior banker. “The Bear situation changed everything: people saw death before their eyes. The Fed and Treasury are in charge now and are not going to let go”.

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Under a regulatory regime dating back to the 1930s, the Fed oversees commercial banks, but investment banks are primarily regulated by the Securities and Exchange Commission.

But as the credit crunch deepened, Ben Bernanke, Fed chairman, Tim Geithner, president of the New York Fed, Hank Paulson, Treasury secretary, and Robert Steel, his number two, have been in unusually close contact with Wall Street executives.

People close to the situation said the Fed and Treasury feared further problems among securities firms could destabilise the financial system and expose US taxpayers to sizeable losses on the new Fed loans.

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