The Obama overhaul, if approved by the U.S. Congress, would constrain the size of banks by widening an existing 10 per cent limit on any bank's share of total insured deposits to include liabilities other than deposits.
And banks would be prohibited from engaging in proprietary trading – that is, making risky bets on investments for the bank's own profit and not for clients.
Proprietary trading has been a source of lucrative profits for the banking industry in the previous decade.
But that activity also helped trigger a global credit crisis in 2008 when subprime mortgage loans and other "toxic assets" held by banks went sour.
The credit freeze in turn helped cause the worst recession since the Depression.
Obama's proposed overhaul also forbids banks from involvement with hedge funds or private-equity funds.
The collapse of two hedge funds owned by Bear Stearns helped bring down what was then America's fifth-largest brokerage in early 2008 – a prelude to the near-insolvency of many of America's other largest banks and brokerages.
Obama also called for banks to set aside larger amounts of capital as cushions against soured investments.
That would be an added constraint on size.
As they grew larger, banks would have to bulk up their capital reserves by setting aside more of their profits as capital reserves or dilute their shares by issuing additional stock to raise capital.
Banks would also have to contribute as much as $150 billion (U.S.) to an emergency fund by which they would finance the bailout of a giant institution that fails.
Obama is also now insisting on creation of a Consumer Financial Protection Agency, an earlier proposal he seemed to lose interest in when it encountered stiff opposition from banks.
The agency would regulate credit cards, mortgages and other financial products.
Obama struck a decidedly populist tone, saying the financial system is "still operating under the same rules that led to its near-collapse," and that taxpayers had been "forced to rescue financial firms facing a crisis largely of their own creation" when they took "huge reckless risks in pursuit of huge profits."
The banks "concealed their exposure to debt" from regulators and investors and took on "risks so vast that they posed threats to the entire system," Obama said.
His reforms mean that "never again will the American taxpayer be held hostage by a bank that is too big to fail."
Banks have strongly objected to the proposed reforms, which have been in the air since the Wall Street crisis began in 2008. But "if these folks want a fight, it's a fight I'm ready to have," Obama said.
Obama also laid a trap for his Republican adversaries. If they oppose his overhaul on Capitol Hill, they will have to explain to voters this fall why they defended the widely disliked banks.
Banks have jacked up interest rates on credit-card and other borrowing to compensate for massive losses resulting from their bad bets.
And they're poised to foreclose on millions of homes, having resisted encouragement from the administration to ease the terms of mortgages taken out by distressed homeowners.
The biggest banks have continued to pay their employees stupendous compensation.
Morgan Stanley Co., for one, has set aside a staggering $14.4 billion for bonuses and other pay after taking its first loss in its 74-year history. That pay is incomprehensible to Americans with fears of losing a job or a home or both.
Obama has been slow to react to the Main Street anger, which showed itself when Massachusetts elected a Republican to take the seat of the late Edward Kennedy, a seat that hasn't gone Republican in 50 years.
Obama's proposed measures chiefly target America's half-dozen biggest banks. After the takeover of failed banks and brokerages in 2008 by surviving ones, America's four largest banks now control 35 per cent of the nation's banking assets. That's up from 28 per cent just two years earlier.
By growing to such awesome size, the biggest banks – already deemed "too big to fail" before the crisis – now present even more of a "systemic" risk to the world economy should they mess up again.
Any new round of government bank bailouts would be far larger than the most recent one.