The Senate on Thursday voted to limit fees charged on credit and debit card transactions, and separately moved to overhaul the credit-rating business as part of a widening Wall Street reform bill.
Both votes handed stinging defeats to the financial services industry, with the political climate in Washington increasingly hostile to the army of lobbyists that has been working for months to weaken and delay proposed reforms.
Final approval of the Senate bill was widely expected next week. It would be the biggest overhaul of financial regulation since the Great Depression, coming more than a year and a half since the worst financial crisis in generations.
President Barack Obama strongly backs tighter rules for banks and capital markets in the wake of the 2008-2009 financial crisis, which tipped the economy into a deep recession and led to huge taxpayer bailouts of banks.
Still to come are big battles over consumer protection and how to regulate the unpoliced $650 trillion derivatives market. Federal Reserve Chairman Ben Bernanke said he was concerned about a part of the bill that could force banks to spin off their swaps desks, adding pressure to allow Wall Street involved in a business that earns them billions annually.
A parallel crackdown is under way in the European Union, with banks and financial firms bracing for changes on both sides of the Atlantic that look likely to pinch their profits, risk-taking capacity and growth potential for years to come.
In a victory for consumer advocates, Senator Richard Durbin, the Senate's No. 2 Democrat, pushed through a measure that would put new restrictions on the fees card networks charge merchants on their transactions.
The measure, approved by a 64 to 33 vote, pitted retailers and restaurants against banks and card firms such as Visa Inc and MasterCard Inc in a bitter lobbying fight.
The measure from Durbin would let merchants give discounts to customers who use one type of card over another, or who pay by cash or some means other than by card. And it would let the Federal Reserve force card networks to set debit-card transaction fees that are reasonable and proportional to the actual cost incurred.
MasterCard said the change will reduce competition and hurt consumers, adding that it is designed to increase profits for big box merchants at considerable expense to consumers, community banks, and credit unions.
The U.S. House of Representatives approved a Wall Street reform bill in December. Whatever the Senate produces will have to be merged with the House bill before a final package can be sent to Obama to be signed into law, possibly by mid-year.
SHAKE-UP FOR CREDIT RATERS
Credit rating agencies such as Moody's Corp, Standard & Poor's and Fitch Ratings would also face big changes under separate measures adopted by the Senate.
Under an amendment offered by Democratic Senator Al Franken, the government would set up a clearinghouse to match rating agencies on a semi-random basis with debt issuers.
That could ease pressures the agencies face to assign rosy ratings to debt instruments issued by the firms that hire them, backers said.
There is a staggering conflict of interest facing the credit rating industry, Franken said on the Senate floor.
Issuers could hire additional agencies for more ratings if they wanted to.
Franken's amendment also would encourage greater competition from smaller ratings agencies.
Another amendment offered by Republican Senator George LeMieux would require federal regulators to develop their own standards of credit-worthiness rather than rely solely on assessments from rating agencies.
Both amendments could open the troubled credit-rating business to more competition, but it was not clear they would make ratings more accurate or timely, analysts said.
Howard Simons, a strategist with Bianco Research in Chicago, said the government board would not fix the rating agencies' tendencies to adopt a herd mentality.
Shares of Moody's closed down 2.6 percent after the votes, and Standard & Poor's parent McGraw-Hill Cos fell 2.4 percent on broadly lower trading across the New York Stock Exchange.
A Standard & Poor's spokesman said the Franken amendment could lead to more homogenized rating opinions and cause investors to believe they were endorsed by the government.
Franken's amendment was approved in a 64 to 35 vote. LeMieux's amendment passed by a 61 to 38 vote.
The Senate rejected an amendment that called for steering troubled financial giants toward bankruptcy, rather than a new process in which government regulators seize and dismantle the distressed firms. By a vote of 42 to 58, the Senate rejected the proposal from Republican Senator Jeff Sessions.
Democrats also defeated a Republican measure that would have ended consumer protections in the bill after four years. Republicans have repeatedly tried to water down the bill's consumer-protection elements on the grounds that they would create burdensome regulations for businesses.
Finally, large financial firms would have to set aside more capital to boost their stability during times of crisis under an amendment unanimously adopted by voice vote. It would direct regulators to increase capital requirements as firms grow in size or engage in riskier lending practices.
The measure, sponsored by Republican Senator Susan Collins, aims to make sure that highly leveraged financial giants do not again threaten financial stability, as they did in the crisis.
(Additional reporting by Rachelle Younglai, with Joe Rauch in Charlotte, N.C., and John Parry in New York; Editing by Gary Hill)