Financial regulation overhaul ahead?

Update: 5:20 p.m. ET.

President Barack Obama gave details of his plans to overhaul financial market regulations this afternoon, in what he called "a transformation on a scale not seen since the reforms that followed the Great Depression."

Financial stocks were lower as investors worked through the proposal, but Standard & Poor's downgraded 22 banks because the rating agency was worried about how the regulatory plan would affect the banks' profits.

The Select Sector SPDR-Financial exchange-traded fund (XLF), which tracks the financial sector of the Standard & Poor's 500 Index ($INX), was off 2.9% to $11.61. The KBW Bank Index ($BKX) fell 3.3% to 35.52.  

The president said he is seeking "a careful balance" in his efforts to regulate the markets.

"With the reforms we are proposing today, we seek to put in place rules that will allow our markets to promote innovation while discouraging abuse. We seek to create a framework in which markets can function freely and fairly, without the fragility in which normal business cycles bring the risk of financial collapse; a system that works for businesses and consumers," Obama said.

The new regulations would give the Federal Reserve the power to oversee financial institutions.

But eyebrows were raised when the administration wants to create a consumer-protection agency that would be able to write rules related to mortgages, credit cards and other consumer products, taking those powers away from the Fed.

The administration would keep most regulating agencies intact, with the exception of the Office of Thrift Supervision, which it plans to merge with the Office of the Comptroller of the Currency.

The Securities and Exchange Commission, which regulates securities firms and markets, and the Commodity Futures Trading Commission, would also get more powers.