After years of worrying whether some commercial banks and investment houses had become too big to fail, the financial crisis has answered that question. Three nationwide giants will dominate the U.S. financial landscape after the dust settles from America's economic earthquake.

Now Washington is left to deal with even larger institutions that are fewer in number and pose an even greater risk to the financial systems. And the conventional wisdom preached on Capitol Hill and lamented at financial firms is that the deregulation era is over and the industry will soon be saddled with new restrictions and energized regulators.

"Democrats are working to put an end to the disastrous anything-goes economic policies of the past eight years," House Speaker Nancy Pelosi, D-Calif., proclaimed Sept. 26.

The comments of Sen. Amy Klobuchar, D-Minn., reflect the predictions of a regulatory renaissance coming from Capitol Hill. "We also have to make sure going forward that the appropriate financial regulations are in place," she said on the House floor Sept. 22. "There should be changes in corporate governance to improve the independence of corporate boards and reduce reckless behavior. There should be limits on speculative behavior."

In reality, however, the debate over the industry's future is shaping up as a slow-motion replay of the ideological divide that cast the Bush administration's rescue package into turmoil last week. Just as a bloc of conservative Republicans instigated a revolt that stopped the House's first attempt to pass the bailout package on Sept. 29, they'll likely be just as adamantly opposed to reversing two decades of financial deregulation.

Over at least the next year or two, Congress will be mired in fights over how to oversee an industry dominated by three stitched-together monsters: Bank of America Corp.-Merrill Lynch & Co., J.P. Morgan Chase & Co.-Washington Mutual Inc. and Citigroup Inc.-Wachovia Corp. And it's anyone's guess whether, before the crisis subsides, these giants may get even bigger. Combined, these institutions now control roughly one-third of U.S. bank deposits.

Already, one fight over how to regulate these new entities was under way as lawmakers hashed out final details of the $700 billion bailout legislation. As a sweetener to House Republicans who voted against the initial version of the rescue package, Treasury Secretary Henry Paulson and congressional leaders added a measure that would require the Securities and Exchange Commission and the Financial Accounting Standards Board to suspend "mark-to-market" financial accounting rules that currently require daily revaluing of bank assets even though the institutions hold them as long-term investments.

Many Republicans have blamed mark-to-market, or fair value, accounting rules for forcing financial institutions to book billions in losses against assets that have declining perceived value but could recover when markets rebound. Some Democrats are signing on to that idea too, even though critics have argued that the rules are needed to prevent banks from inflating the values of essentially worthless securities.

"This standard requires institutions to value assets at fire-sale prices," says Rep. Peter DeFazio, D-Ore., leader of a group of Democrats that opposed the bailout plan. "This creates a capital shortfall on paper." As part of his alternative rescue legislation, DeFazio urged dropping the fair-value regime and replacing it with one that incorporates historical values of thinly traded assets.

Other battles will likely be fought over how much capital banks and other financial institutions must keep on hand to offset potential losses, how easy it should be for large financial institutions to merge, whether to limit executive compensation and changes to corporate governance rules.

With the landscape radically altered, regulators will have no choice but to grapple with how to supervise the enormous new institutions, says Steve Verdier, director of congressional relations for the Independent Community Bankers of America, a trade group for smaller local banks. "It's important to step back and ask, 'Is it really in the public interest to have so much of our financial industry dominated by a tiny number of huge institutions?' "

Verdier insists that local banks will be able to survive quite nicely despite the competition from the likes of Citi, J.P. Morgan and BofA by luring customers who put a premium on hometown management and personal service.

He says the real danger isn't to competition but to the threat of another financial crisis. He sees few options to the bailout at the moment but warns the giants are creating yet another potential systemic failure. "One of the problems we're facing today is that some institutions are too humongous to fail. Now were creating institutions that are even more humongous."

Jim Eckenrode, banking analyst at Tower Group Inc., agrees that the turmoil will create a "broader mandate for more oversight of all institutions." But he says the industry faces little added risk because a few institutions are now much bigger. He points out that since the Gramm-Leach-Bliley Act passed in 1999, Bank of America is the only institution to even attempt the full integration of commercial banking, brokerage and investment banking the law's authors envisioned when they broke down the barriers between commercial banking and other financial services. Consequently, he says, BofA has been able to navigate the crisis in good health and pick up two of the biggest names in retail finance, mortgage giant Countrywide Financial Corp. and brokerage-investment banking house Merrill Lynch.

BofA shows that "banks benefit by having a more diversified income stream provided by the universal bank model," he says. "BofA has operated as a very large institution for quite a number of years now, and it's worked just fine. Now there are three of these huge institutions instead of just one."

Tumultuous as the current changes are, the end result, he says, is a U.S. market that resembles what has existed in other developed economies for years. "We're moving to a banking system like what has been built in the U.K., France and Japan, where each country has five, six, maybe seven large institutions."

Eckenrode does see a viable role for community banks and the relatively large regional banks. Those that wisely avoided subprime lending are weathering the crisis. "The scenario being portrayed in the mainstream media is doom and gloom, but, rather, what we're seeing is separation of strong institutions from the weak. A lot of the regional banks are performing well," he says. "The percentage of delinquent loans to performing loans is really low; they're making money."

The thriving regionals he sees include Zions Bancorp of Salt Lake City; BB&T Corp. of Winston-Salem, N.C.; U.S. Bancorp in Minneapolis; Wells Fargo & Co. of San Francisco; and Citizens Financial Group Inc. in Providence, R.I.

As for the biggest banks, Eckenrode says they finally "will have to get their acts together" to make the integrated model work. By that he means break down the silos that divide the operations and make better use of client databases, risk management and new products. "Banks that operate across sectors don't have a strong picture of who their customers are across those various lines of business," he says -- even BofA.

He predicts today's meltdown will provide the incentive for them to seriously pursue the universal bank model. "Until 18 months ago, times were good," he says, adding that banks' return on assets in recent years have been twice the historical average. "Without a burning reason to get it done, ingrained cultural issues have been difficult to overcome."

Like Verdier, Eckenrode predicts the biggest institutions must submit to greater regulation. But in what may become one of the biggest ironies of today's crisis, the steps Washington has taken to grasp the financial problems so far have been deregulatory when it comes to the big houses.

In addition to easing mark-to-market rules, which the SEC did Sept. 30, regulators have eased other rules to help financial institutions slog though the credit crunch. On Sept. 14, for instance, the Federal Reserve greatly expanded the types of collateral it will accept from institutions that participate in the central bank's primary dealer credit facility. Previously, only Treasury securities, agency securities and AAA-rated mortgage-backed and asset-backed securities could be pledged. Now all investment-grade debt securities are eligible.

Two weeks after that change, banking regulators made it easier for institutions to meet capital requirements by reducing the amount of "goodwill" banks must deduct from capital after acquiring another institution. In another decision, the FDIC and the New York State Banking Department on Oct. 1 lifted a nearly two-year-old order against Mitsubishi UFJ Financial Group Inc. The regulators had issued the rule after they found some of Mitsubishi's U.S. units lacked adequate anti-money-laundering compliance programs. Termination came only a week after Mitsubishi UFJ agreed to invest $8.5 billion in Morgan Stanley, an infusion that shores up the firm's capital and will help it convert into a commercial bank. Convenient timing aside, the FDIC says only that the order was lifted because the Japanese bank had "addressed the issues" in its compliance program.

Despite the re-regulatory mood of many in Congress, reversing the recent relaxation will be difficult at a time when the industry is trying to get back on its feet. The ongoing battle over mark-to-market accounting demonstrates how difficult it will be to tighten up.

House Republican leader John Boehner, R-Ohio, says mark-to-market rules bear a major part of the blame for banks' troubles because they have had to book losses on securities that might not be realized after the credit market crisis has passed. "Onerous mark-to-market rules for certain financial assets that have no market value have worsened the credit crisis," he said in a statement.

But accounting firms and investor groups opposed the SEC's decision to ease up and will likely fight any further statutory relaxation. "Suspending fair-value accounting during these challenging economic times would deprive investors of critical financial information when it is needed most," the Council of Institutional Investors, Center for Audit Quality and CFA Institute said in a joint statement.

Many Republicans are urging their colleagues to re-examine accounting burdens imposed by the Sarbanes-Oxley Act, enacted after the Enron Corp. and WorldCom Inc. bookkeeping scandals.

Such battles are all but certain if Congress pursues initiatives popular with the shareholder rights movement, such as increasing investors' say in board elections or limiting executive pay.

Harvard law professor Mark Roe says the giant new banks might be more vulnerable to the corporate governance movement than before. Shareholders are more likely to view management as removed from the interests of investors and demand more say in deciding their companies' futures. For most of their history, banks and other financial institutions were too small and geographically fragmented to attract the attention of the shareholder rights movement," he says. But "in 2008 we now have truly national financial institutions."

Eckenrode predicts financial institutions can avoid heavy-handed restrictions from government and shareholders simply by being more transparent. Lack of transparency led to many of today's problems, he says. Mortgage securitization, which enabled the housing boom, was ultimately brought down because banks could not accurately gauge the value of the instruments. To improve transparency enough to restore securitization, banks must invest in technology necessary to identify the source of assets underlying the securities so the ultimate owners can understand what they are buying. Although securitization has dried up for now, he says the housing market can't come back without it. "Requiring U.S. banks to return to keeping the loans on their balance sheets would severely constrict consumers' ability to obtain mortgages," he says.

Whether the new regulatory regime is light or heavy, one thing is clear. A greatly empowered Federal Reserve Board will oversee the new landscape.

Nearly all the large institutions now will be bank holding companies that answer primarily to the Fed rather than the SEC or the Office of Thrift Supervision, which was WaMu's main regulator before its seizure. Creating a single regulator for prudential regulation with the Fed, presumably, on top was a primary goal of a capital markets reform plan introduced by Paulson in March. With WaMu now controlled by a Fed-regulated parent, OTS is out of the business of overseeing large financial institutions. The SEC is as well -- last week it acknowledged that its voluntary program for supervising investment banks was a flop and ended the program.

Verdier hopes that handing the Fed new duties over nearly all the large holding companies will be enough to squelch another idea in Paulson's blueprint -- a suggestion to do away with the home lending-focused thrift charter and the OTS altogether.

"The regulatory and federally insured part of the regulatory system has worked terrifically well in this crisis," he says. "It was the unregulated part that got us into trouble. Congress should not spend a moment fussing over whether we need three or four regulators. That would be like firing an employee because his desk is messy. Our system is messy on paper, but it's proven workable."

Verdier points out that Goldman Sachs Group Inc.'s and Morgan Stanley's recent decisions to become Fed-regulated bank holding companies was made so as to allow them the best business model in today's environment. "Institutions are moving to the Federal Reserve option on their own," Verdier says. "The challenge Congress will have is looking at what parts of the system need changing and leaving the parts that worked in place. We hope they'll do that."