By Brady Dennis

A key House Democrat introduced a contentious proposal Wednesday that would give federal regulators power to dismantle financial firms before they grow so large that their failure could endanger the entire financial system, even if those firms appear to be healthy and well capitalized.

"No firm should be considered to be 'too big to fail,' " Rep. Paul E. Kanjorski (D-Pa.) said in a statement Wednesday morning. "To maintain a vibrant economy, financial companies need to take risks, but we cannot afford the risk of losing our entire economy. Having made the difficult decision last year to rescue our economic system with the use of federal tax dollars, I hope that no Congress will need to face a similar situation in the future."

Kanjorski's proposal will come in the form of an amendment to legislation that the House Financial Services Committee is considering this week. That bill, drafted by committee chairman Rep. Barney Frank (D-Mass.) in consultation with the Treasury Department, aims to create a structure that allows regulators to monitor for systemic risks and empowers the government to wind down large, troubled firms whose failure poses threatens the larger financial system.

The primary difference with Kanjorski's amendment is that regulators wouldn't have to wait until a company was in trouble to step in. They could act preemptively to limit the size, scope and risk levels at an institution if they believed it had begun to pose a risk to financial stability. Kanjorski said Wednesday that officials could take a variety of actions, including changes to existing regulatory standards, limiting mergers and acquisitions and, in the most extreme cases, breaking up the company.

Frank has expressed support for Kanjorski's measure. But it has encountered vehement opposition from the financial industry, whose representatives argue that large firms provide unique economic value and reach that smaller institutions simply can't match. They also claim that arbitrarily limiting the size and scope of certain companies would put the United States at a disadvantage in the global marketplace.

"To be sure, too-big-to-fail must be eliminated," the Financial Services Forum wrote in a letter to lawmakers last week. "But the problem is not that some institutions are large, it's that there is currently no legal authority to unwind, in an orderly way, a failing financial conglomerate as the FDIC is currently authorized to wind down a bank. More effective supervision, coupled with the authority to seize and wind down large firms, is the appropriate remedy to too-big-to-fail."

Kanjorski insisted Wednesday that he doesn't intend to put American firms at a disadvantage. He noted that the European Union is considering similar action and that "harmonized regulations would benefit both economies."

Frank's committee is set to continue hashing out the details of the bill throughout the week.