A sweeping overhaul of financial regulations will include a controversial plan to insulate banks from risky swap dealing, aides said on Thursday as lawmakers hammered out a final bill.

With final negotiations on the reform bill bogged down amid partisan bickering, Democrats who control the process neared consensus on an element that has drawn furious opposition from the Wall Street banks that could lose billions in profits.

The deal would require banks to isolate their swaps desks in separate affiliates, which would require the banks to raise new capital and deprive them of profits they get from dealing. But it would allow their parent holding companies to retain the value of the operations.

But negotiators remained at odds over another sticking point: how to cover the costs of dismantling troubled financial firms before they threaten the broader economy, as happened during the 2007-2009 financial crisis.

The broadest overhaul of Wall Street rules since the 1930s would establish new consumer protections, crimp big banks' profits and saddle the industry with tighter regulations in a bid to avoid a repeat of the crisis, which led to the deepest recession in generations.

With congressional elections looming in November, Democrats aim to harness widespread anger at Wall Street and iron out by June 24 the remaining differences between bills already passed by the House of Representatives and the Senate.

That would give President Barack Obama an example for other world leaders to follow at a summit of leaders of the Group of 20 industrialized and developing economies in Toronto, which starts on June 26. Europe is aiming to tackle similar reforms, but the United States is far ahead.

On Thursday, the U.S. Federal Reserve won another battle to maintain its independence as lawmakers on the House-Senate panel dropped a plan to have the head of its New York division appointed by the U.S. president, rather than its board of directors.

However, they decided to prevent bankers on regional Fed bank boards from participating in the selection of their Fed bank chief.

The U.S. central bank, whose authority some lawmakers had wanted to rein in amid wide criticism for lax oversight before the crisis, will actually see its powers increase under the sweeping overhaul of financial regulation.


Separately, lawmakers also agreed to give banks more time to comply with higher capital requirements to help them ride out crises, though they remained at odds over which firms could be grandfathered under the proposal.

They also agreed to exempt small companies, those with market capitalization under $75 million, from a requirement in the Sarbanes-Oxley law that requires them to show they have internal controls in place to ensure the accuracy of their books.

The White House intervened to weaken a provision that aims to give shareholders more say on how companies are governed, though the panel had yet to formally act.

Lawmakers had hoped to resolve a central element of the bill that would give regulators clear authority to seize unstable financial firms before they threaten the economy in an effort to avoid a repeat of the recent crisis, but postponed action after they failed to reach an agreement.

House lawmakers insisted on setting up a $150 billion fund to cover costs for liquidating troubled financial firms, paid for by firms with more than $50 billion in assets.

Senate negotiators rejected that proposal, insisting that costs should be covered by selling off the troubled firm's assets. Other firms would have to chip in if the asset sales did not cover the bill.

The banking industry does not want to pay any fees up front.

Democrats in both chambers agree that banks, not taxpayers, should foot the bill next time. They brushed aside Republican charges that the new process would encourage reckless behavior.


Knowing that the funeral service, casket and plot are paid for does not make death any more compelling, at least not for a normal person, said Democratic Representative Luis Gutierrez.

The new plan would give regulators clear authority to step in and dismantle troubled firms if they deemed them a risk to the system, tools that they lacked in the recent crisis.

At the height of the meltdown, regulators persuaded Congress to authorize $700 billion in funding to bail out Wall Street firms, spurring widespread voter anger.

Regulators did not take a consistent approach to troubled firms during the crisis. They provided $182 billion to bail out insurer American International Group while they let Lehman Brothers declare bankruptcy and steered investment banks Bear Stearns and Merrill Lynch into mergers with other firms.

When it next meets on Tuesday, the committee plans to tackle consumer-protection plans and whether to limit fees on debit-card transactions. The committee plans to address the controversial trading limits later in the week.

Once a final bill is agreed, it must be approved by the full House and Senate before Obama can sign it into law.

(Additional reporting by Rachelle Younglai, Charles Abbott and Kim Dixon; editing by Leslie Adler and Mohammad Zargham)