Senator Chris Dodd, the bill's sponsor, called the final version "hardly perfect"
The US Senate has passed a bill containing the biggest overhaul of banking regulation since the 1930s.
Although approval by the House of Representatives is still needed for the reforms to become law, the passage through the Senate removes the biggest remaining hurdle.
The bill is the culmination of efforts led by President Barack Obama to ensure that the financial crisis of 2008-09 can never be repeated.
The crisis saw the collapse of the housing and stock markets, as well as the expensive government rescue of major financial firms such as insurer AIG and government mortgage agencies Freddie Mac and Fannie Mae.
It also led to the deepest recession in the US since World War II, with unemployment topping 10% of the workforce and the government deficit rising to more than 10% of GDP.
"Our goal is not to punish the banks," said President Obama, "but to protect the larger economy and the American people from the kind of upheavals that we've seen in the past few years."
Why is the Senate's approval so important?
The Senate's move makes it almost certain that Congress will enact sweeping financial regulation later this year, with leading congressmen predicting this could come as soon as 4 July.
Opposition by Senate Republicans had been considered the biggest stumbling block to financial reform, ever since the Democrats lost their "super-majority" of 60 seats earlier this year.
However, in the event, four Republican senators supported the bill, including Scott Brown, whose surprise capture of Teddy Kennedy's old Massachusetts seat gave Republicans a blocking minority.
This is in stark contrast to Mr Obama's health care bill, which was passed by the Senate last year while the Democrats still enjoyed a supermajority, but was not supported by a single Republican senator.
What happens next?
A separate bill has also been passed by the House of Representatives - the other chamber of Congress.
Representatives of the two chambers will now meet to hammer out a compromise version of the two bills that will be acceptable to both the Senate and the House, in a process known as "reconciliation".
This means that some provisions in the Senate's bill may still be removed or watered down, while other provisions from the House's bill may be included.
Democratic senator and banking committee chairman Chris Dodd, who sponsored the original Senate bill, described the final version as "hardly perfect".
However, given the Democrats' weak position in the upper chamber, it is the Senate's version of the bill that is likely to dominate.
What is in the Senate bill, and what is likely to pass reconciliation?
- A new Consumer Protection Agency will be created with a mandate to clamp down on abusive practices by credit card companies and mortgage lenders. A big chunk of the enormous losses in the sub-prime mortgage market was due to fraudulent lending to US home buyers who had no hope of repaying their loans. The agency is also likely to be given oversight of the financing of car purchases, although this was not included in the Senate bill.
- Regulatory oversight of the financial markets will be ramped up, with the creation of a new "Council of Regulators" that will bring together the heads of the various financial watchdogs. The Federal Reserve (the US central bank) is likely to have a leading role. All regulators, and especially the Federal Reserve, were accused of failing to identify the housing market bubble that preceded the financial crisis, and the new council will be charged with spotting such a build-up of risk in the financial system in future.
- Regulatory authorities will be given new powers to seize and conduct an orderly liquidation of large financial firms like Citibank. It is hoped that this will address the so-called "too big to fail" problem, that pushing these enormous firms into a full-blown and complex bankruptcy process during the height of the financial crisis - as happened with Lehman Brothers - could destroy the entire financial system. The House version of the bill contains a $150bn fund, to be paid for by the banks, that would cover the cost of such liquidations, but this is likely to be scrapped in reconciliation.
- Banks may be stripped of their proprietary trading activities (that is, the ability of traders to make large speculative bets on financial markets using their bank's money, rather than their clients). This was a key plank of the so-called Volcker Rule, named after Paul Volcker, Chairman of the Economic Recovery Advisory Board, who proposed it. The Senate version watered down the rule, leaving it up to regulators to decide how stringent it should be. However, both the House and Senate leaders have indicated that it will be beefed up in reconciliation.
- Most of the $600bn derivatives market will need to be cleared through third parties. Derivatives are contracts that allow companies to hedge their exposure to (and hedge funds and banks to speculate on) the financial markets. The reform will reduce the risk that institutions that wrote these derivative contracts - like Lehman Brothers or AIG - fail to pay out the amount they owe when they go bust.
- Banks would be required to hive off their swaps businesses, in order to reduce their exposure to potential losses. Swaps are among the most profitable types of financial derivatives carried out by the banks. This requirement was a late inclusion in the Senate bill proposed by its agricultural committee, and is not included in the House version of the bill. It is opposed by regulators, including Federal Reserve chairman Ben Bernanke, and is unlikely to survive reconciliation.
Are the reforms popular?
The bill is surprisingly draconian, considering the widespread opposition of Senate Republicans to President Obama's proposed financial reforms.
However, clamping down on Wall Street plays well with voters from across the political spectrum, and it is likely that many senators had November mid-term elections in mind when they decided to vote in favour.
Public ire is likely to have been further inflamed by the return of big bonuses for bankers this year, as well as the accusations of fraud levelled at Wall Street firm Goldman Sachs by US regulators.
"When this bill becomes law, the joyride on Wall Street will come to a screeching halt," said Senate majority leader Harry Reid after the vote.
However, Republicans who opposed the bill were particularly critical of the Consumer Protection Agency, which they considered unnecessary bureaucracy.
"[The bill] places layer upon layer of unnecessary new regulations on financial institutions that will undoubtedly have a chilling effect on the ability of American families and businesses to access credit," said Republican senator Judd Gregg.
What do the banks think?
Unsurprisingly, the banks lobbied heavily against the new reforms.
As financial markets recovered sharply over the last 12-18 months, banks began to turn in big profits again.
But most of those profits have been derived from the banks' trading activities, precisely the business area that will be worst affected by the new reforms.
The Senate proposals to hive off banks' proprietary trading and swaps businesses have roused their particular ire.
And the requirement to shift derivatives contracts on to third-party clearing houses is likely to make them much less profitable, as the contracts will need to be simpler and their pricing more transparent.
President Obama criticised the financial services industry for unleashing "hordes of lobbyists and millions of dollars in ads" against the bill.
Interestingly though, Wall Street firms significantly scaled back their contributions to congressional mid-term election campaigns in April, according to data recently filed with the Federal Election Commission.
They also shifted their focus from Republican to Democratic candidates, perhaps in recognition that passage of the bill had become inevitable.
What about here in Europe?
Brussels has revealed proposals for a national network of "resolution funds" partly paid for by the banks, which would be used to help dissolve failing banks rather than bailing them out.
There are also new rules on hedge funds and private equity funds which have been approved by EU finance ministers, despite opposition from the City.
There is also a growing international consensus on the need to tax banks more heavily and to clamp down on banks' usage of tax havens.
The IMF has proposed two new taxes - one on banks' profits and bonus pools to fund the cost of dealing with future financial crises, and a second aimed at discouraging risky borrowing by the banks.