The US Treasury has revealed its blueprint for the biggest overhaul of regulation of the financial sector since the 1930s.
Critics have said that the credit crunch and resultant market turmoil made a strong case for change.
But Treasury Secretary Henry Paulson rejected claims that existing regulations have led to the turmoil.
And he said the plan should not be implemented until current difficulties roiling financial markets are resolved.
The plan would beef up the powers of the Federal Reserve, which earlier this month engineered the purchase of troubled investment bank Bear Stearns by JP Morgan.
It would give it greater oversight of all kinds of financial institutions from hedge funds to insurance companies.
"Government has a responsibility to make sure our financial system is regulated effectively. And in this area, we can do a better job," Mr Paulson said.
The government says the proposals are an effort help US firms become more competitive in the global economy.
The 218-page report was commissioned before credit markets began to seize up in August last year.
Fears of exposure to high-risk assets have made banks and financial institutions increasingly reluctant to lend to each other.
Bear Stearns got into trouble when other banks refused to lend it money over fears that it had too many bad debts due to the sub-prime mortgage crisis.
The proposals give sweeping powers to the Federal Reserve - enabling it to tackle the kind of turmoil that is currently hitting financial markets.
Fed becomes market stability regulator
Second regulator to oversee banks
Business conduct regulator to protect consumers
Mortgage market to come under greater scrutiny
The Fed would become "market stability regulator" - allowing it to examine the books of any financial institution deemed to potentially threaten the stability of the financial system.
The overhaul will see a new organisation set up to take over the role of the five separate banking regulators.
A body to regulate business conduct and consumer protection is also likely to be proposed.
"Our current regulatory structure was not built to address the modern financial system," Mr Paulson said.
"We should and can have a structure that is designed for the world we live in."
"One that is more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions and one that will better protect investors and consumers."
Among other measures proposed is the creation of a commission to establish stricter criteria for firms involved in the mortgage market.
Mortgages for sub-prime borrowers, those with poor or patchy credit histories, have been at the heart of the recent market turmoil that has resulted in billions of losses for big banks.
A merger of the Securities and Exchange Commission, which regulates companies with publicly traded shares, with the Commodities Futures Trading Commission, which oversees commodities trading is also part of the proposals.
The review into the sector began early in 2007 after the financial services industry complained that over-regulation from Washington meant US firms were not as globally competitive as they could be.
Before travelling to Europe, President George W Bush said that he wanted congress to pass several pieces of legislation which he saw as "vital priorities".
These include a housing law which would enable more homeowners who were battling to meet mortgage payments to refinance their loans.