WASHINGTON (CNNMoney.com) -- President Obama on Wednesday unveiled his long-anticipated plan to restructure how banks and other firms are regulated in the hope of preventing another financial collapse.

The far-reaching effort would reorder the roles of some key agencies to try to tighten government supervision of the financial sector. It would also toughen up standards for big financial firms and create a new agency dedicated to consumer protection.

"We did not choose how this crisis began. But we do have a choice in the legacy this crisis leaves behind," Obama said. "So today, my administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression."

On Thursday, Treasury Secretary Tim Geithner will head to Capitol Hill to detail the Obama proposals and answer questions. Most of the administration's plans will require legislation to gain force.

One of Obama's more drastic moves would be to abolish the embattled Office of Thrift Supervision and merge it with the Office of the Comptroller of the Currency.

The OTS has been on the hot seat for months for its role as the overseer of American International Group (AIG, Fortune 500) and failed lenders IndyMac and Washington Mutual. The comptroller's office is a Treasury Department bureau that regulates national banks.

Geithner said OTS is the only agency on the chopping block because of its past role in regulatory "arbitrage." Current rules allow some banks to effectively pick their regulator, and OTS is an agency many firms gravitated to when they sought to evade tougher regulators.

"Those problems were at the center of many of the things that went wrong with our system, and we have an obligation to fix that," Geithner said.

Two regulators would get expanded powers under the Obama proposal: Treasury and the Federal Reserve.

Obama called for the creation of a council of regulators chaired by the Treasury secretary to work alongside the Fed to monitor system-wide risk.

However, the Fed would have most of the power for systemic risk, Geithner said. Top administration officials decided to give the Fed more power after looking at other nations with regulatory councils.

Treasury would also get veto power over Fed decisions to make emergency loans to companies teetering on the verge of collapse. Over the past year, the Treasury has been signing off on such loans. But Geithner said the power should be formalized, since Treasury plays an important role safeguarding taxpayer spending.

"It's the taxpayers that have to live with the moral hazards" of such emergency loans, he said.

In addition, Obama proposed the establishment of a new watchdog agency aimed at protecting consumers from deceptive or dangerous mortgages, credit cards and other financial products.

The new consumer agency would take on some powers that currently reside with other regulators like the Fed. It will also have the power to enact rules and inspect firms.

"This crisis was not just the result of decisions made by the mightiest of financial firms; it was also the result of decisions made by ordinary Americans to open credit cards, take out home loans and take on other financial obligations," Obama said.

The new agency would lay out new rules for mortgage lending, "so that the bad practices that led to the home mortgage crisis will be stamped out," according to Obama.

The president acknowledged that his proposal will likely spur controversy.

"There has always been a tension between those who place their faith in the invisible hand of the marketplace -- and those who place more trust in the guiding hand of the government," Obama said. "That tension isn't a bad thing."

"We are called upon to recognize that the free market is the most powerful generative force for our prosperity -- but it is not a free license to ignore the consequences of our actions."

Mixed bag for banking industry

Lawmakers have already begun hearings on the issue of regulatory reform. Final passage on the Obama proposal could take months, but White House officials hope to get the regulatory reforms passed by winter, insiders say.

One sticking point may be new powers the proposal would grant the Fed to force big financial firms, including those that aren't banks, to keep a certain amount of money aside in reserves.

Some in the banking industry said the new capital requirements appear to be tougher than they had expected.

Jaret Seiberg, a policy analyst with Concept Capital's Washington Research Group, called the proposal "worse for the financial sector than was expected." He points out that regulators can require banks to shore up their capital levels even if Congress balks at that piece of the proposal.

Obama defended his plan to empower the Fed to hold banks and large financial firms more accountable, saying that "if you can pose a great risk, that means you have a great responsibility."

A lot of banks and trade associations oppose the new consumer protection agency -- especially the idea of giving it power to curb financial products if they're found to be deceptive or unfair.

"We have a concern creating another regulatory burden, and wonder how they plan on paying for the agency," said Dan Berger, head lobbyist for the National Association of Federal Credit Unions, which otherwise supports the reform plan.

But most of the banking industry expected -- and some even called for -- giving the Federal Reserve more powers to monitor systemic risk and setting up a new way to unwind big financial firms.

Scott Talbott of the Financial Services Roundtable said banks "won, tied and lost" in the proposal, pointing out aspects they supported, opposed and could accept.

And the Financial Services Forum, which represents 17 chief executives, said the proposal overall appears "comprehensive" and "reasonable," said president Rob Nichols.

"I think this is a great start of the dialogue for what's going to take place on the Hill over the next six months," Nichols said.

Securities and derivatives also on agenda

The White House also aims to tighten up supervision of the securitization markets, requiring firms that originate a security to keep 5% of the "securitized exposure." That means whoever created the financial product would still hold a piece of it, even as it got resold, and would have some interest in its ultimate performance.

The proposal calls for the regulation of all over-the-counter derivatives, including the kind of credit default swaps that led to the collapse of AIG. In addition, officials want to make sure that such products aren't marketed to "unsophisticated" investors.

The Obama plan would address the conflicts of interest that occur when financial firms work with rating agencies to get a golden seal of approval on a financial product.

Rating agencies have been blamed for exacerbating the financial crisis by giving top ratings to bad financial products. The official speaking Tuesday did not offer details as to how rating agency oversight might be toughened.



Finally, the White House plans to build on the role of the Federal Deposit Insurance Corp., now charged with taking over bad banks, and give it and other regulators more power to take over and unwind other kinds of troubled financial companies beyond banks.

"The FDIC is at the center of that model, and we're going to adapt that model to make it work for large complex financial institutions," Geithner said. "The FDIC will play a central role."