Lawmakers softened several of their toughest restrictions on banks' trading activity on Wednesday as they neared completion of a sweeping rewrite of financial regulations.

But as a final bill took shape, the dozens of tweaks offered by Democrats looked likely only to change the bill at its margins. Banks and other financial players faced tougher oversight, tighter regulation and diminished profits.

A proposal that would sharply restrict banks' trading activities appeared likely to remain in the bill as negotiators from both the House of Representatives and the Senate said it would encourage them to focus on lending.

They cannot continue to do business as they were doing, said Representative Barney Frank, the Democrat who is overseeing the process. They have to get back in the business of accumulating capital and making loans to private parties.

Frank aims to hammer out a final bill by Thursday evening, which would allow President Barack Obama to tout it as a blueprint for other economic powers at this weekend's G20 meeting in Canada.

Democrats are eager to crack down on a deeply unpopular industry after the 2007-2009 financial collapse that touched off a global recession and public bailouts of Wall Street banks. But they have backed off from many of their toughest proposals as their self-imposed deadline approaches.

House Democrats agreed to drop a proposal that would have required large banks to set aside a total of $150 billion to cover the cost of liquidating troubled financial firms.

Instead, regulators would cover those costs by selling off the troubled firm's assets and levying fees on other banks if more money was needed.

Democrats also agreed to empower regulators to impose a 15-to-1 leverage limit on large banks and financial firms, but Senate Democrats sought to limit the requirement only to firms that threaten the health of the economy.

SOFTER DERIVATIVES CRACKDOWN

House Democrats proposed softening a crackdown on the $615 trillion derivatives market by allowing participants to use non-cash collateral to meet margin requirements on their trades.

They also would give a break to the financial arms of manufacturers like Caterpillar and Boeing, by exempting them for two years from tighter clearing, capital and margin requirements for their derivatives use. That would broaden an exemption already available to other nonfinancial businesses that use derivatives to offset risks, like utilities and airlines. [nWNA4111]

They did not weigh in on the most controversial aspect of the crackdown on the derivatives market, which exacerbated the crisis and forced an expensive bailout of insurance giant AIG.

As it stands, the bill would force banks to spin off their lucrative swaps-dealing operations to ensure that taxpayer-backed deposits are not put at risk.

The sponsor of that provision, Democratic Senator Blanche Lincoln, has since said that banks would be able to house their swaps-dealing operations in a separately capitalized affiliate of their holding company.

The panel is expected to take up derivatives on Thursday.

House Democrats also proposed a new $4 billion tax on large banks and hedge funds to help unemployed people hold on to their homes.

That is separate from a much larger tax on the industry that Congress could take up later this year.

Senate negotiators had yet to weigh in on the proposals.

The House and Senate must approve the final bill before Obama can sign it into law. Passage would give Democrats a major legislative victory to add to healthcare reform before November's congressional elections.

Bank lobbyists, often working closely with Republicans, have tried to block or water down the bill but have had limited success in the face of widespread voter anger at Wall Street.

TIGHTER 'VOLCKER RULE'

Senate Democrats offered a tightened version of a White House proposal known as the Volcker rule that would limit banks trading for their own profits, unrelated to customer needs.

Investors say that could significantly limit profitability.

The long-term fear is they turn banks into utilities, said Michael Nix of Greenwood Capital Associates, who predicted the entire bill could lead to a 10 percent to 20 percent reduction in equity for some banks. Bank stock prices already reflect that prospect, he said.

Details of the proposal were not immediately available, but it was expected to limit regulators' ability to waive the proposed ban.

However, it could allow banks to maintain small investments in private equity and hedge funds, according to aides. Banks have pushed hard for the exemption, arguing that it is key to their asset-management business.

Members of the House-Senate panel face a laundry list of other outstanding issues before they can complete their work.

They must resolve the balance of powers between state and federal regulators, and determine which banks would be required to raise their capital reserves -- a pet cause of Senator Susan Collins, one of several moderate Republicans whose support is crucial for passage.

(Additional reporting by Andy Sullivan, Charles Abbott, Kim Dixon, and Rachelle Younglai in Washington and Joe Rauch in Charlotte, North Carolina; writing by Andy Sullivan, Editing by Kristin Roberts and Andrew Hay)

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