The Obama administration on Thursday unveiled draft legislation that would grant regulators "sweeping expansion" of authority to seize non-bank financial companies whose collapse could jeopardize the economy.

Treasury Secretary Timothy Geithner called for the new power on Thursday when he testified before the House Financial Services Committee. He told the panel the current system failed in basic, fundamental ways and has proven to be too unstable and fragile.

"Over the past 18 months, we have faced the most severe global financial crisis in generations," Geithner said. "To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game."

"The new rules must be simpler and more effectively enforced and produce a more stable system, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market," he said.

Under current law, the government can only seize banks. The draft bill would grant it "resolution authority," which would allow the government to impose tougher standards on financial institutions judged to be so big that their failure would represent a risk to the entire system.

It would also extend federal regulations for the first time to all trading in financial derivatives, exotic financial instruments such as credit default swaps, and would require larger hedge funds to register with the Securities and Exchange Commission.

Moreover, it would enable the government to reduce the need for taxpayer funds, said the Treasury.

For example, it would enable the federal agency acting as conservator or receiver to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution's contracts, including those with its employees, and to address the derivatives portfolio, thus reducing the potential for further disruption.

"The legislative proposal would fill a significant void in the current financial services regulatory structure and is one piece of a comprehensive regulatory reform strategy that will mitigate systemic risk, enhance consumer and investor protection, while eliminating gaps in the regulatory structure," the Treasury said in a statement.