Under the new legislation, the government will have the power to break up any company that is deemed 'too big to fail', while a new federal bureau will be established to oversee consumer lending.
Large banks will also be required to increase the amount of capital they hold, although this measure will only come into effect in five years to enable financial institutions to continue lending money and sustain the economic recovery.
Banks are also to be banned from proprietary trading and limited to a maximum three per cent investment of their tier one capital in private equity firms and hedge funds.
It had initially been proposed that banks would be given tougher restrictions on how much they could invest in such vehicles, but these plans were altered last month.
A senior Wall Street executive told the Financial Times at the time: "It is a victory for us because it gets away from this concept that we would have to spin off or sell most of these businesses."
By Gary Cooper