WASHINGTON (Reuters) - The House of Representatives approved the biggest changes in financial regulation since the Great Depression on Friday, marking a win for the Obama administration and top Democrats in Congress.

The sweeping bill, which will have to be reconciled with any measure the slower-moving Senate might eventually approve, aims to safeguard the financial system and ward off future crises of the type that punished the nation in the past year with its deepest recession since the 1930s.

The House voted 223-202 to pass the 1,279-page bill, which was hammered out in the months since last year’s crisis convinced Democrats of an urgent need for reform. All of the chamber’s Republicans and 27 Democrats voted against bill.

“This legislation brings us another important step closer to necessary, comprehensive financial reform that will create clear rules of the road, consistent and systematic enforcement of those rules, and a stronger, more stable financial system,” President Barack Obama said in a statement.

The bill would create an inter-agency council to police systemic risk in the economy, crack down on hedge funds and credit rating agencies, set up a financial consumer watchdog agency, and expose Federal Reserve monetary policy to unprecedented congressional scrutiny, among other reforms.

Faced with a recession and multi-billion-dollar taxpayer bailouts of firms such as AIG and Citigroup Inc , started by the Bush administration, Obama and fellow Democrats have vigorously pushed for fundamental regulatory change.

LOBBYISTS FIGHTING REFORMS

Republicans and an army of lobbyists for banks and Wall Street firms, whose profits may be threatened, have fought back for months to weaken and delay reforms, criticizing what they call an unneeded and costly intrusion on business.

The battle will continue in the Senate, which is pursuing its own legislation -- more modest in some ways, more radical in others. Once a bill clears the Senate, the two chambers will have to agree on a compromise to send to Obama to become law.

The House bill faced a flood of amendments during floor debate this week, with mixed results for both sides.

In a win for the banking industry, the House voted to reject a measure that would have allowed bankruptcy judges to change the terms of mortgages for distressed homeowners.

Known as “mortgage cramdown,” the measure was defeated in a 188-241 decision as a proposed amendment to the broader bill. The vote marked a reversal from the House’s passage in March of a “cramdown” measure that later died in the Senate.

On another vote, Democrats beat back an attempt to weaken a key provision of the reforms bill -- the proposed creation of a Consumer Financial Protection Agency.

An amendment proposed creating instead a council of regulators, which the White House said would let banks and mortgage and credit card firms “continue to get away with the practices that helped cause the financial crisis.”

In a setback for corporate good-governance activists, the House rejected an amendment that would have required small corporations with market capitalization of less than $75 million to get external reviews of their internal financial controls under regulations passed after the Enron fiasco.

The amendment concerned applying certain audits under the 2002 Sarbanes-Oxley laws to small firms. By rejecting the proposal, which was supported by senior Democrats, lawmakers left an earlier amendment in the bill that would permanently exempt small firms from complying with the rules for audits.

A tourist is reflected in water as he takes pictures on Capitol Hill in Washington, August 25, 2009. REUTERS/Jim Young

OTC DERIVATIVES TARGETED

The House approved a section of the reforms bill on Thursday that would impose regulation for the first time on the $450 trillion over-the-counter derivatives market, including credit default swaps like those at the root of AIG’s problems.

The bill “will increase transparency in the marketplace and reduce the systemic risk that over-the-counter derivatives can pose to the economy if left unchecked,” said Democratic House Agriculture Committee Chairman Collin Peterson in a statement.

Regulators would be empowered to set position limits on financial and commodity-based derivatives, under the bill.

The House also backed an amendment from Democratic Representative Stephen Lynch to limit financial firms to 20 percent ownership stakes in OTC derivatives clearinghouses.

If ultimately approved, the Lynch measure could affect Wall Street giants that dominate OTC derivatives markets -- Goldman Sachs Group Inc, JPMorgan Chase & Co, Citigroup, Bank of America Corp and Morgan Stanley -- and exchange operators such as Nasdaq OMX.

In a rebuke to the Federal Reserve, the bill would open up monetary policy decisions to audits by congressional watchdogs. The central bank fought the provision, arguing it could imply politics can sway Fed decisions and spook the markets.

House Financial Services Committee Chairman Barney Frank said the Fed audit provision could go too far.

“The Fed could be audited,” Frank told CNBC television. But he added, “The amendment that was adopted went too far ... It could give the perception that monetary policy is not going to be independent and that would have an inflationary effect.”

In addition to systemic risk regulation and the CFPA, the broader House bill would give the government new powers over large banks and set up new protocols for dealing with large firms, known as “too big to fail,” that get into trouble.

It would also impose new curbs on executive pay, strengthen protections for investors and, for the first time, set up a federal office to monitor the insurance industry.

Banks stocks ended the day higher, with the KBW Banks index slightly outperforming the benchmark Dow Jones industrial average on broadly bullish trading.