President Obama: "We should not accept a system that consistently puts us in danger"
The US government has announced a major reform of banking regulation to prevent future financial crises.
The overhaul will require big banks to put more money aside against future losses to curb excessive risk taking.
Consumers will get a special agency to protect their interests and regulate mortgages and credit cards.
In outlining the reforms, President Barack Obama described them as the biggest shake-up of the US system of financial regulation since the 1930s.
The US central bank, the Federal Reserve, will be given the authority to monitor major financial institutions.
The US president said the lack of oversight among finance firms prompted systemic abuse causing risks for both companies and individuals.
"We are working hard to build a new foundation for sustained economic growth. This will not be easy," he said.
"We know that this recession is not a result of one failure but of many. And many of the toughest challenges we face are the product of a cascade of mistakes and missed opportunities which took place over a course of decades."
The aim is to deal with the weaknesses that the sub-prime crisis and the financial meltdown revealed in the fragmented US regulatory system.
"With their proposals today, the administration has moved this critical debate from broad discussion to specific action - this is an important step forward," said Timothy Ryan, chief executive of the Securities Industry and Financial Markets Association.
He said it was a "once-in-a-generation opportunity to rebuild our regulatory structure so that our financial system is more stable, more resilient and better underpins a dynamic US economy".
But not everyone was so positive.
Peter Morici of the Smith School of Business at the University of Maryland described the changes as "a huge bureaucratic overreach that will prove ineffective and too costly".
In talking about the causes of the financial crisis Mr Obama said complex financial instruments were meant to spread risk but instead concentrated it.
"It was easy money," he said. "But these schemes were built on a pile of sand."
The changes are aimed at dealing with systemic risks that could harm the whole financial system, raising capital requirements for banks, ensuring that the government can take over failing institutions, and protecting consumers and investors.
A new Consumer Financial Protection Agency will be created and the Federal Trade Commission will gain new powers to protect consumers, as well as more powers for the Securities and Exchange Commission, for the benefit of investors.
There will be more regulation of hedge funds, securitised debts and over-the-counter derivatives, all of which have been blamed for exacerbating the financial crisis and leading to a "culture of irresponsibility" that dominated Wall Street, said Mr Obama.
"Mortgage brokers will be held to higher standards, exotic mortgages that hide exploding costs will no longer be the norm, home mortgage disclosures will be reasonable, clearly written, and concise," said Mr Obama.
And shareholders will be given more power to question executive bonuses.
The reforms will also fulfil the commitments made by the US at the G20 summit in London to join in the worldwide effort to toughen financial regulation.
Bear Stearns' problems caused shockwaves in global financial markets
The reforms will enhance the power of the Federal Reserve to supervise and ultimately order the takeover of any financial institution in trouble.
But the central bank will have to gain Treasury Department approval before it can offer more credit to firms in "unusual and exigent circumstances."
It was the inability of the US government to take over Lehman Brothers that threw the financial markets into turmoil in September last year.
A new council of regulators, the Financial Services Oversight Council, is to be created to co-ordinate the supervision of the banking system.
Meanwhile, one banking regulator - the Office of Thrift Supervision - will be abolished.
And the Fed will lose some of its powers to regulate mortgages to the new Consumer Financial Protection Agency.
Fight in Congress
The proposals for regulatory reform could face significant opposition in Congress.
Mr Obama has said he expected Congress to "work swiftly to get these laws into place", but warned that his plans would be a "heavy lift" because they faced opposition from "special interests".
Ethan Siegel, of the Washington Exchange, which assesses laws for institutional investors, said: "I think that the Obama administration has put on the table a politically smart, pragmatic and reasonable package, especially given the territorial politics of Capitol Hill."
But he added: "I'm very sceptical that they can get any significant reform through the Congress this year."
US MEDIA REACTIONS TO OBAMA'S PLANS
There's no question that Wall Street is going to mobilise - is already mobilised - to defeat the administration's positive proposals. What remains very much in question is the administration's willingness to engage in bare-knuckled political fighting to defend these proposals, as well as whether the public will be mobilised to support these and other moves to control Wall Street.
Overall, the white paper offers a highly skewed narrative of the financial crisis. All of the misbehaviour took place in the private sector. No mention is made of government policies that contributed. Instead, the story is one of government that needed a better regulatory structure and more powers.
Parking systemic risk authority at the quasi-insulated Fed seems like the right call. So that's one important decision the administration got right - to not hubristically insist that they, themselves would be immune to the political factors that make it difficult to do this kind of thing correctly.
My biggest concern is that systemic risk just isn't nearly as easy to spot as it sounds in these discussions of a systemic risk regulator... It's not at all clear to me that the systemic risk regulator will be able to pre-emptively identify future financial products that, when used in a certain far-from-initially-obvious way, lead to greater system-wide risk. Nor is it clear to me that, even if the regulator were able to identify these products and their uses, banks, hedge funds, etc. would listen to them.
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