The new legislation, which President Clinton says he will sign, allows commercial banks, insurance companies and securities houses to enter one another's business, and merge with each other.

It repeals the provisions of the Glass-Steagall Act, passed in 1933 during the Depression when thousands of US banks went under, which prohibited cross-holdings and interstate banking.

Wall Street finally united with Main Street to press for reform

The bill was passed overwhelmingly by the Senate 90-8 and by the House of Representatives by a vote of 357-57.

Supporters of the move say it will ensure that US financial institutions can compete in the increasingly global world of finance, and that the resulting efficiencies will lower costs to consumers.

"Today Congress voted to update the rules that have governed financial services since the Great Depression, and replace them with a system for the 21st century," said US Treasury Secretary Lawrence Summers.

Republican Senator Phil Gramm, co-author of the legislation, said:

"The world changes, and we have to change with it."

But critics charge that the bill could destabilise the US financial system, and would undermine the provisions of previous legislation which required lending to poor areas.

Democratic Senator Paul Wellstone said: "Congress seems determined to unlearn the lessons from our past mistakes."

Rocky road to passage

The financial reform act has had a long and difficult passage.

For more than two decades, financial institutions have sought to reform US banking laws - but have been divided among themselves as to how to go about it.

The divisions between Wall Street banks and smaller regional banks, and between securities firms and insurance companies, slowed the pace of reform.

Meanwhile, the world changed, as banking consolidation gathered pace, and international institutions sought to buy US banks.

This time, the financial sector managed to present a united front, as well as making $30m in political contributions to key Congressmen.

Meanwhile, two of the biggest US financial institutions, Citibank and Travellers Insurance, merged anyway in anticipation of the legal reform.

Now analysts expect that big securities firms like Merrill Lynch and Goldman Sachs will now be in the market for takeovers, with a rapid consolidation of the insurance market in sight.

Community re-investment issues

Many of Democrats who opposed the measured were concerned that it will weaken the provisions of the Community Reinvestment Act, which mandates banks to provide adequate lending to the poor in areas they serve.

The legislation was "mean-spirited in the way it had tried to undermine the Community Reinvestment Act," said Representative Maxine Waters.

The bill also had to overcome a rare turf war between the US Treasury and the Federal Reserve over who will regulate the new financial conglomerates.

In the event, both will have a role, with smaller mergers coming under the Comptroller of the Currency, while the Fed will retain responsibility for the financial system as a whole.

$50bn Mutual loophole

In addition, the insurance industry appears to have inserted a provision in the legislation that will allow mutual societies to avoid paying out any money to their members if they convert to a listed company.

Two of the biggest US mutual insurers, the Prudential Life Insurance Company and Metropolitan Life, are in the process of converting to stockholder companies.

The new law will allow any mutual insurance company to avoid the windfall payments by moving to another state and setting up a hybrid structure called a mutual holding company.

It could save the industry as much as $50bn.