By Alison Vekshin

Nov. 18 (Bloomberg) -- U.S. regulators would have the power to dismantle healthy, well-capitalized financial firms whose size threatens the economy under a measure proposed today by Representative Paul Kanjorski.

The amendment to regulatory overhaul legislation would let the government break up a firm, limit its mergers and acquisitions and force a company to stop activities deemed systemically risky, according to a summary from Kanjorski’s office. The financial industry is opposed to the legislation.

“Financial firms that want to play in a casino need to have their own resources to cover their bets and not assume that tax dollars are available in reserve if their bets fail,” Kanjorski, a Pennsylvania Democrat, said in a statement.

The amendment would modify legislation being considered by the House Financial Services Committee to create a council of regulators, including the Federal Reserve, to monitor large, interconnected firms for risks they pose. It’s part of the effort in Congress to overhaul financial rules to prevent a repeat of the worst financial crisis since the Great Depression.

Kanjorski’s measure would empower the council to break apart firms considered well-capitalized and healthy if they are “so large, interconnected or risky that their collapse would put at risk the entire American economic system,” according to the summary.

It requires the council to consult with the president before taking “extraordinary” actions. The amendment doesn’t cap the size of financial firms, the summary said.

Industry Opposition

The proposal would require the council to give Congress an annual report detailing the size, concentration and interconnectedness of the 50 largest U.S. financial institutions based on assets.

The financial industry opposed Kanjorski’s proposal.

“It will act as a strong disincentive for financial firms to grow and to be able to serve corporate America,” said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, representing many of the largest U.S. financial firms in Washington.

While a policy of having government prop up systemically important firms must be eliminated, targeting an institution’s size isn’t the remedy, said Rob Nichols, president of the Financial Services Forum.

“More effective supervision, coupled with the authority to seize and wind down large firms, is the appropriate remedy,” Nichols said.

Lawmakers are seeking to prevent further taxpayer bailouts after last year’s rescues of American International Group Inc., Citigroup Inc. and Bank of America Corp. under the $700 billion Troubled Asset Relief Program.