Reporting from Washington — The Obama administration's overhaul of financial regulations took a big step forward Wednesday as a key House committee approved legislation that would give federal officials broad new powers to downsize and dismantle large financial firms whose failure would seriously damage the economy.
The House Financial Services Committee voted 31-27 to pass the expanded ability to deal with teetering financial giants -- authority that was limited when investment banker Lehman Bros. and insurer American International Group Inc. neared bankruptcy last year.
As part of the legislation, government regulators would be able to step in when a huge firm is on the verge of collapse and take it apart in an orderly way to avoid market panic. Regulators can do that now with banks but not with more complex financial institutions.
In addition, financial firms would be required to pay into a fund to cover government costs of such takeovers.
The committee's bill goes beyond the powers requested by the Obama administration. It grants regulators additional authority to preemptively break up large financial institutions that pose a "grave threat to the financial stability or economy of the United States."
The legislation also would impose stricter congressional oversight on the Federal Reserve, authorizing the Government Accountability Office to conduct detailed audits on a variety of the central bank's activities.
The legislation is the final major piece of a package of reforms that the full House could vote on as early as next week. Other components of the overhaul include the creation of an agency to protect consumers in the financial marketplace and increased oversight of complex derivatives.
Banking and business groups strongly oppose creation of the Consumer Financial Protection Agency, which they said would limit the ability of financial institutions to offer credit to consumers.
The U.S. Chamber of Commerce, which has been leading the opposition to the agency, sent a letter Wednesday to every member of Congress urging them to vote against it.
"While we agree that the financial crisis exposed failures in consumer protection regulation that need to be addressed, we are concerned this bill would do far more harm than good -- for consumers, for the business community, and for the overall economy," the chamber wrote.
"Rather than address the failures within existing regulatory agencies, this bill would create a new and massive government bureaucracy that would reduce consumer choice, stifle innovation and restrict access to credit just as we are beginning to see signs of an economic recovery," the letter said.
The Senate is working on its own overhaul of financial regulations, but is unlikely to comply with President Obama's appeal for action this year. Still, Treasury Secretary Timothy F. Geithner said Wednesday's vote "moves us another important step toward comprehensive financial reform that will create a more stable financial system with better protection for consumers and investors."