By Kimberlee Kruesi

WASHINGTON (MNI) - The proposal Tuesday by the chairman of the Senate banking committee to drastically change the financial regulatory system drew mixed reviews from those mostly directly affected which generally focused on elements they did not like.

"It is really important that Sen. Chris Dodd's Senate Banking Committee proposal gives regulators the power to break up large and complex companies," said Heather McGhee, director of the policy research and advocacy organization, Demos, a group generally critical of the banking industry.

McGhee said Dodd's proposal was a return to the Glass-Steagall Act's separation of commercial and investment banking. After its repeal in 1999, financial institutions evolved to business models many critics said contributed to the current financial crisis.

Glass-Steagall enforced a rigid wall between the commercial and investment banks; systemic risk was kept at a minimum and financial crises were not as frequent, McGhee said.

"We are seeing a lot more responsiveness on the part of the leadership in the House and the Senate to pushing back to the deregulatory mandates that the bank lobby has been pushing," McGhee said.

But Dodd's proposal lacks the key Glass-Steagall component, McGhee said.

"We think what is missing is not just breaking up the size of the institutions but the blending of inherently risky investment activities with the regular business banking," she said.

McGhee said Demos will pursue a discussion with Dodd to ensure the GSA key element is implemented in the bill.

Earlier in the day Dodd released the proposal that amounts to a more consolidative approach, combining bank regulatory functions much more than the House Financial Services Committee version.

Dodd's bill would create a new consumer financial protection agency, establish a safe and disciplined process to unwind financial firms, and create an independent agency with a board of regulators to monitor systemic risk challenges. This agency could require companies that threaten the economy to divest of some of their holdings.

Currently the legislative language is still open to discussion and will undergo changes in the weeks ahead.

However, the American Bankers Association released a statement warning the proposal would "tear apart the existing regulatory structure" and "impose extensive new regulatory burdens on those banks that had nothing to do with creating the financial crisis." The ABA said it would oppose Dodd's language.

The Mortgage Bankers Association was also critical of his proposal but said it would keep working with him to make it better. Even the Federal Deposit Insurance Corporation reacted immediately with some qualifications, but said the effort to craft better legislation will continue.

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