The U.S. House of Representatives approved the biggest changes in financial regulation since the Great Depression on Friday, marking a win for the Obama administration and congressional Democrats.

With the Senate due to debate similar reforms well into next year, the House voted 223-202 to pass a 1,279-page bill hammered out in the months since last year's financial crisis convinced Democrats of an urgent need for reform.

The bill would create an inter-agency council to police systemic risk in the economy, crack down on hedge funds and credit rating agencies, set up a financial consumer watchdog agency, and expose Federal Reserve monetary policy to unprecedented congressional scrutiny, among other reforms.

Faced with a recession and multi-billion-dollar taxpayer bailouts of firms such as AIG and Citigroup Inc stemming from the Bush administration, U.S. President Barack Obama and fellow Democrats are vigorously pushing for change.

Republicans and an army of lobbyists for banks and Wall Street firms, whose profits would be threatened, have fought for months to weaken and delay reforms, criticizing what they call an unneeded and costly intrusion on business. The battle will continue for months to come in the slower-moving Senate, which is expected to push for more modest legislation.

Once the separate bills pass the House and Senate, the chambers would have to agree on legislative compromise that could be passed into law.

The House bill faced a flood of amendments during floor debate this week, with mixed results for both sides.

In a win for the banking industry, the House voted to reject a measure that would have allowed bankruptcy judges to change the terms of mortgages for distressed homeowners.

Known as mortgage cramdown, the measure was defeated in a 188-241 decision as a proposed amendment to the broader bill. The vote marked a reversal from the House's passage in March of a cramdown measure that later died in the Senate.

On another vote, Democrats beat back an attempt to weaken a key provision of the reforms bill -- the proposed creation of a Consumer Financial Protection Agency (CFPA).


An amendment proposed creating instead a council of regulators, which the White House said would let banks and mortgage and credit card firms continue to get away with the practices that helped cause the financial crisis.

In a setback for corporate good-governance activists, the House rejected an amendment that would have required small corporations with market capitalization of less than $75 million to get external reviews of their internal financial controls under regulations passed after the Enron fiasco.

The amendment concerned applying certain audits under the 2002 Sarbanes-Oxley laws to small firms. By rejecting the proposal, which was supported by senior Democrats, lawmakers left an earlier amendment in the bill that would permanently exempt small firms from complying with the rules for audits.

The House approved a section of the broad reforms bill on Thursday that would impose regulation for the first time on the $450 trillion over-the-counter derivatives market, including credit default swaps like those at the root of AIG's problems.

The bill will increase transparency in the marketplace and reduce the systemic risk that over-the-counter derivatives can pose to the economy if left unchecked, said Democratic House Agriculture Committee Chairman Collin Peterson in a statement.

The House also backed an amendment from Democratic Representative Stephen Lynch to limit financial firms to 20 percent ownership stakes in OTC derivatives clearinghouses.

If ultimately approved, the Lynch measure could affect Wall Street giants that dominate OTC derivatives markets -- Goldman Sachs Group Inc, JPMorgan Chase & Co, Citigroup, Bank of America Corp and Morgan Stanley -- and exchange operators such as Nasdaq OMX.

In addition to systemic risk regulation and the CFPA, the broader House bill would give the government new powers over large banks and set up new protocols for dealing with large firms, known as too big to fail, that get into trouble.

It would also impose new curbs on executive pay, strengthen

protections for investors and, for the first time, set up a federal office to monitor the insurance industry.

(Editing by Andrew Hay)