House committee passes new bank rules

WASHINGTON (CNNMoney.com) -- A key House committee, culminating months of debate over how to reform bank rules, voted Wednesday in favor of legislation that aims to prevent firms from growing too big and threatening the financial system.

The House Financial Services Committee passed the bill by a margin of 31-27 along strict party lines, with all Democrats voting in favor and all Republicans voting against. The bill, which proponents consider key to preventing the kinds of problems that caused last year's crisis, will now move to the full House of Representatives for debate and a vote.

Rep. Barney Frank, D-Mass., chairman of the committee, said Wednesday that he believes the full House will consider and vote on the package next week.

The bill would impose stronger supervision of Wall Street and impose tougher capital requirements for banks, while proposing a new way to take over big firms such as American International Group (AIG, Fortune 500). It also includes legislation to regulate derivatives and create a consumer financial protection agency.

But on the Senate side of Capitol Hill, the bill is moving much more slowly and final passage is likely months away.

Also, the bill faces a potential hangup in the House, as the Congressional Black Congress (CBC) on Wednesday announced its displeasure with the lack of support for minority communities in prior financial sector bailout legislation. The CBC said its support for such bills that do not support minority communities, which were hit particularly hard during the recession, "stops today."

"This particular moment provides an opportunity," said Rep. Maxine Waters, D-Calif., a member of the Financial Services Committee and the CBC. "If we're going to support this bill, which gives regulators extraordinary powers, we have to make sure those powers will benefit small and minority owned businesses as well."

The House bill creates a new kind of unwinding process for big firms, and forces them adhere to stronger supervision mostly by the Federal Reserve working with an oversight council.

Most observers, including those in the financial industry, agree that government officials didn't have the right tools to properly manage the failures of insurer AIG and investment bank Lehman Brothers.

The bill would also tax big banks to create a $10 billion fund to pay for government takeovers.

One of the most controversial parts of the House bill is a provision to allow the Government Accountability Office to audit Fed activities. Some fear the proposal would interfere with the central bank's ability to carry out independent monetary policy.

Fed Chairman Ben Bernanke, in an opinion piece in the Washington Post, decried the proposal and one in the Senate bill that aims to strip the Fed of its regulatory powers over banks.

"These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States," Bernanke wrote.

House Republicans have generally opposed the "too big to fail" package, because they say it gives government too much power. They would prefer that Congress establish a special bankruptcy process to allow big firms to be liquidated through the court system.

The Senate, led by Banking Committee Chairman Chris Dodd, D-Conn, lags the House in trying to reform financial regulation.

Dodd's bill, only recently unveiled, includes several far-reaching proposals, such as the creation of a super-regulator for all banks -- a move the Fed opposes.

Dodd had also said he wants the Senate Banking committee to start working on his bill next week. But myriad objections to the legislation, coming from both Republicans and fellow Democrats on his committee, has pushed the bill into closed-door negotiations that could last a few weeks.

"Barney Frank will get a bill out of committee and through the House, and it will look pretty similar to what he's been proposing," said Brookings Institution economist Douglas Elliott, a former J.P. Morgan investment banker. "The bigger wild card is the Senate. It's not clear whether Sen. Dodd has sufficient level of his support for his ideas."

Additionally, the creation of a consumer financial protection agency, already passed by the House committee, could be a deal-breaker for Senate Republicans. The proposed agency would be charged with ensuring that personal financial products, such as mortgages and credit cards, are fair to consumers.

While the new consumer agency is a White House priority, ranking Republicans in the Senate really don't like it and could filibuster to prevent it from coming to the floor if their demands aren't met, Elliott said.

-- CNNMoney.com staff writer David Goldman contributed to this story