The U.S. Senate's top banking legislator proposed ambitious financial regulation reforms on Tuesday, leaping beyond earlier proposals to tighten bank regulation, protect consumers and police systemic risk.

In the 1,136-page bill, Senate Banking Committee Chairman Christopher Dodd called for creating three new government agencies, regulating over-the-counter derivatives, and cracking down on hedge funds, credit rating agencies and executive pay.

Flanked by eight other Democratic senators at a news conference, Dodd said he is targeting the first week of December for his committee to work on the measure.

It raises the stakes in a debate under way for months now in Washington over how to bring the government's antiquated regulatory system into the 21st century and prevent a repeat of the capital market crisis that last year brought the world financial system to the brink of disaster.

The late 2008 collapse of former Wall Street giant Lehman Brothers and massive taxpayer bailouts of mega-firms such as AIG and Citigroup angered voters, driving lawmakers toward reforms that have taken shape only slowly.

The financial crisis exposed a financial regulatory structure ... unable to prevent threats to our economic security, Dodd told reporters at the news conference.

This proposal will create a new architecture to make our financial institutions more transparent, more responsible, and more accountable, said Dodd, whose difficult re-election race in Connecticut means he needs to look tough on Wall Street.

The bill was expected to win little or no support from Republicans, setting the stage for still more debate ahead, with analysts expecting no final Senate action until 2010.

The size, complexity and controversy of the Dodd bill mean it is unlikely that the bill will be passed by the Senate before the end of the year, said policy analyst Brian Gardner at investment firm Keefe Bruyette & Woods.

REACTION TO BILL MIXED

Reaction off Capitol Hill was mixed, with the American Bankers Association saying Dodd's plan would tear apart the existing regulatory structure, only to create a faulty new one.

Consumer and housing activists praised Dodd's support for the Obama administration's proposal to create a Consumer Financial Protection Agency (CFPA) that would regulate mortgages, credit cards and other financial products.

But Senator Richard Shelby, the banking committee's top Republican, said last week he and Dodd are still far apart on key issues, including the CFPA. Even some Democratic senators at the press conference said the Dodd bill needs work.

As expected, it calls for a new super bank regulator -- the Financial Institutions Regulatory Administration, or FIRA.

The agency would consolidate the bank supervisory powers of four current regulators and abolish the Office of Thrift Supervision and the Office of the Comptroller of the Currency.

The Federal Deposit Insurance Corp and the Federal Reserve would lose their roles as direct bank supervisors.

The bill outstrips proposals from the administration and a bill under development in the House of Representatives. Both seek more modest centralization of bank supervision.

Another agency proposed by Dodd would be a council of regulators, with a staff, to monitor threats to the economy from large financial firms. The proposal expands on systemic risk council ideas from the administration and the House.

The agency could require companies that threaten the economy to divest some of their holdings, said a summary of the bill, highlighting the embrace by more policy-makers of government powers to break up too big to fail firms.

INSURANCE MONITOR PROPOSED

Break-up power over large banks and financial firms is also being pursued in the European Union, where regulators are also calling for higher bank capital standards and new regulations.

The Dodd bill would also establish a National Insurance Office, which would be the first attempt by the U.S. government to monitor the industry, which is now regulated by states.

The FDIC would be the primary agency, under the Dodd bill, for unwinding troubled financial firms, with the cost of dismantling them recouped later by assessments on other firms.

Shareholders would get more say on pay practices, under the Dodd bill, and stronger corporate governance rules on pay.

The House is on track for a final vote on financial regulation reform before the end of the year. In July, it approved a bill to put new curbs on executive pay.

The House Financial Services Committee has already approved measures on credit rating agency oversight, derivatives market regulation and consumer protection.

In June, the administration released more than a dozen proposals for financial regulation reform, with the aim of preventing a repeat of last year's financial crisis.

(Additional reporting by Rachelle Younglai, Karey Wutkowski,

Charles Abbott, with Karen Brettell in New York; Editing by Jan Paschal)

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