President Obama is about to recommend creation of a regulatory agency to protect consumers in their credit, savings and other banking transactions.
The new agency and a newly empowered Federal Reserve will be two of the central elements of a broad overhaul of the financial regulatory system that the president will announce on Wednesday, officials said.
Already the nation's central bank, the Fed would supervise large financial institutions that are considered so big that their failure could undermine America's economy, according to the administration proposal.
But even as the Fed gains powers, Obama also would transfer some banking authority that now rests with the Fed and the Treasury Department to a new consumer agency — the Consumer Financial Protection Agency.
The expanded Fed role and the new consumer regulator are likely to be the two main political flash points in the administration's proposal. Many bankers oppose a new consumer protection regulator and many lawmakers in Congress worry the Fed could turn into a too-powerful and independent financial overseer. Friction over those points could slow any major overhaul of banking and market regulations.
In addition to having the Fed supervise "systemically significant" institutions, Obama will recommend a council of regulators, which would include the Fed, to monitor risk throughout the broader financial system.
The arrangement is designed to prevent any more crashes like those that felled AIG and Lehman Bros.
Obama said Tuesday the rules will try to eliminate the kind of excessive risk-taking by financial institutions that proved "very dangerous to the American people."
"It's going to be, as usual, a heavy lift because there are going to be people who want to keep on taking these risks, counting on U.S. taxpayers to bail them out if their bets go bad," he said.
Obama's decision to create a consumer agency comes amid criticism that mortgage lenders and credit card companies have taken advantage of unwitting customers and saddled them with debt. The financial crisis was precipitated in part by the preponderance of securities backed by mortgages that went sour when the housing market collapsed.
Treasury spokesman Andrew Williams said lax consumer protections contributed to the financial crisis and that the recession revealed even more weaknesses in consumer protections across the spectrum of financial markets. The new agency, he said, will "help ensure that consumers have the protection and the representation they deserve."
The new regulator would have the power to impose fines and allow states to pass laws that are stricter than the federal standards — an approach favored by consumer advocates. Consumer protections are now spread among various state and federal authorities, including the Fed, the Securities and Exchange Commission, the Federal Trade Commission and banking regulators.
"Tremendous problems could have been avoided had such an agency weighed in against some of the abusive practices that Congress acted on only recently," said Travis Plunkett, legislative director of the Consumer Federation of America, citing excessive bank fees and misleading practices.
But business leaders made their opposition clear.
David Hirschmann, president and CEO of the U.S. Chamber of Commerce's Center for Capital Markets, said the chamber will oppose a standalone agency "that cannibalizes regulatory expertise, adding yet another regulatory layer."
The administration will also have to use its political skills to strengthen the Fed. While Democrats generally agree with a need for regulatory changes, many oppose relying too heavily on the Fed.
They say its status as a politically independent organization would make it difficult to keep the newly empowered organization in check.
"What happens if the representatives of the people and the president want a certain action and it's not taken?" asked Rep. Paul Kanjorski of Pennsylvania, a senior Democrat on the House Financial Services Committee.
"You can't fire the chairman of the Federal Reserve," Kanjorski said.
Sen. Christopher Dodd, chairman of the Banking Committee, is likely to become Obama's toughest opponent on Capitol Hill.
In private deliberations with the administration, Dodd has advocated an alternative plan to strip the Fed of its regulatory role entirely. Dodd's plan would create a new consolidated bank regulator that would assume the roles that the Fed and Federal Deposit Insurance Corp. now play in helping regulate state-chartered banks.
Under this scenario, the Fed would focus on its existing mission as the nation's central bank — setting monetary policy and acting as a "lender of last resort."
Lawmakers, including Dodd, also say they are open to the administration's proposal that the Federal Deposit Insurance Corp. be put in charge of dismantling financial institutions that the Fed and Treasury Department decide pose a threat to the economy.
Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, has not taken a position on the administration's plan to bolster the powers of the Fed.
But a number of other House members, including Republicans, say it's a terrible idea.
In a staff document circulated last week, House Republicans on the committee argued that expanding the Fed's responsibilities and increasing government spending pose "a far more significant source of 'systemic risk' to our nation's economy than the failure of any specific financial institution."
Associated Press writers Alan Zibel, Jeannine Aversa and David Carpenter contributed to this report.