Among Treasury chief's recommendations: Widening Fed's reach and creating a federal regulator for mortgage industry.
NEW YORK (CNNMoney.com) -- Treasury Secretary Henry Paulson on Monday proposed a set of sweeping changes to the nation's financial system, including a broad expansion of the Federal Reserve's powers, in what could herald the biggest regulatory overhaul of Wall Street since the Great Depression.
The plan comes as concerns about the housing crisis and its fallout in the financial system continues to fuel calls for change in Washington. The changes, if enacted, would be largely invisible to consumers but would drastically alter how the financial services industry is regulated.
"Government has a responsibility to make sure our financial system is regulated effectively," Paulson said. "And in this area, we can do a better job."
Among the plan's biggest proposals is to provide additional powers to the Federal Reserve, which, along with the Treasury Department, has attempted to shepherd the nation through the housing crisis. Earlier this month, the Fed orchestrated a marriage between JPMorgan Chase (JPM, Fortune 500) and Bear Stearns (BSC, Fortune 500), which was on the verge of a collapse that could have caused shockwaves throughout the financial system.
Under the Paulson plan, the Fed would essentially serve as a financial markets moderator, stepping in if the nation's markets were again threatened by an episode like the near collapse of Bear Stearns. Currently the central bank is responsible for setting the country's monetary policy as well as acting as a supervisor of certain banks and all bank holding companies.
Another cornerstone of the plan would involve combining some of the existing agencies that oversee the financial services sector in an effort to streamline regulation and close gaps in oversight.
Under the proposal, the Securities and Exchange Commission, which ensures the functioning of financial markets and is responsible for protecting investors, would merge with the Commodity Futures and Trading Commission, which regulates the trading of futures contracts. Meanwhile, the Office of Thrift Supervision would be folded into the Office of the Comptroller of the Currency.
The proposal would also establish a new federal regulator for the mortgage industry, affecting both lenders and brokers, which now follow a patchwork of state regulations.
Paulson's plan includes other bold moves, including bringing previously unregulated financial entities like hedge funds and private equity firms within the reach of federal authorities and federalizing the oversight of the insurance industry.
But it is cautious in not pushing for too much regulation, which could meet with criticism from Congressional Democrats.
Since his appointment as Treasury chief, Paulson has warned that heightened regulation would hinder American financial markets to compete with maturing foreign markets