The Bush administration is preparing to recommend the most far-reaching overhaul of the nation's financial system since the Great Depression, a top-to-bottom revamping that could eventually change the way nearly everybody in the nation handles money.

Proposals now being drafted by the Treasury Department would rewrite the laws that have governed U.S. banks, savings and loans, brokerage houses and insurance companies for half a century.

Whether Congress will go along with such a wide-ranging program remains to be seen, but the White House said that an overhaul of the financial system will be the top item on its domestic policy agenda.

The plan, to be made public in January, would impose new limits on federal deposit insurance that would take the program back toward its original purpose of protecting small savers.

The barriers between banking and other businesses that were erected after the Depression of the 1930s would be torn down. Banks would be allowed to become stockbrokers, sell insurance and underwrite bonds.

Wall Street firms would be allowed to buy banks, as would other companies that now are banned from the banking business.

State lines would no longer be barriers to banks. Banks would be allowed to buy other banks and open branches anywhere, leading to the creation of the first nationwide banks.

The administration is calling its initiative a cure for the mounting troubles of the banking industry. Experts agree the banking system today is the weakest it has been at any time since the Depression, which prompted the writing of the existing banking laws. Already hammered by losses on real estate, corporate buyouts and Third World debt, banks are facing the threat of a recession.

Treasury officials said they want to give consumers more choices in managing their money and open up new opportunities for banks to make money. The administration also said that the package is needed to catch up with technological and financial innovations that have made existing rules obsolete.

"In the age of the {automatic teller machine} and the 800 number ... we must rethink and reexamine our existing regulations and the need for change," President Bush said in a recent speech.

The Treasury's approach reflects a vast change from the way regulation was handled under the Reagan administration.

The guiding principle of the Reagan years was that government regulation shackled businesses from realizing their true potential. The Bush administration's Treasury Department, even though it is advocating major change, treats regulation as a pragmatic tool that must be used to prevent excesses that threaten the financial system.

Moreover, Treasury officials argue that the banking system should be insulated from the forces of the free market because of the necessity for the government and the taxpayers to step in when the system is in jeopardy.

Under the Treasury proposals, banks would be deregulated in some areas and reregulated in others. The strongest banks would be given freedom to expand into new ventures and would be rewarded for their success with lower deposit insurance premiums. Banks now pay premiums to the Federal Deposit Insurance Corp.'s insurance fund, which guarantees up to $100,000 in each account in member banks.

Weak institutions would come under closer scrutiny and be subjected to tighter restrictions on their business. They would also pay higher premiums for deposit insurance, reflecting the more likely prospect that they would become a burden to taxpayers.

The proposals also would erect "fire walls" between banks and their affiliates involved in other businesses to protect the insured deposits and prevent these funds from being siphoned off to finance riskier activities.

"The problem is finding a way to seal off the insured depositor and making sure that the benefits of deposit insurance should not be used as an unfair advantage," a senior Treasury official said.

Protecting the rapidly dwindling deposit insurance fund is one of the top goals of the administration, which is trying to find a way to pump money into the fund without the kind of taxpayer involvement that was needed for cleaning up failed savings and loan institutions.

The legislation passed to clean up the S&L industry mandated the Treasury to write a report on deposit insurance, which was blamed for encouraging reckless thrifts to make risky investments with the comfort of knowing that if they failed, the taxpayers would pick up the tab.

The Treasury has decided to go far beyond the original mandate and link deposit insurance changes to a sweeping overhaul of the financial industry.

"The administration feels strongly that issues of deposit insurance reform -- that is, the extent and character of the safety net -- are so closely intertwined with questions of reform of the industry's structure that it makes no sense to treat them separately," Treasury Secretary Nicholas F. Brady said in a speech last week.

Bank failures could be more costly this year than ever before, FDIC Chairman L. William Seidman has indicated. If that proves true, the depleted insurance fund will have less than $10 billion, a relatively small amount to protect the estimated $2 trillion in deposits in the nation's commercial banks.

The administration hopes that the troubles of the banking system will force Congress to move quickly, just as the S&L crisis last year provoked legislation that was signed into law less than eight months after it was proposed.

But the banking industry isn't in as bad shape as the thrifts were, and the industry's relative health may make it difficult to get such an ambitious proposal through Congress. If the banking system continues to deteriorate, though, as many experts fear will happen, pressure for systemic changes will surely increase.

Whichever route is followed, legislation will come under the scrutiny of powerful legislators such as Senate Banking Chairman Donald W. Riegle (D-Mich.), House Banking Committee Chairman Rep. Henry B. Gonzalez (D-Tex.) and Rep. John D. Dingell (D-Mich.), who has a deep interest in the securities business.

While there is an emerging consensus in Congress on how to deal with deposit insurance, there is not one on restructuring. And the prescription of increased banking powers as a remedy for the industry's ailments runs head-on into the argument that the same solution was offered half a dozen years ago as the sure cure for the ills of the thrift industry.

The thrifts got their additional powers and immediately used them to leap into risky new ventures in which they had no experience and promptly lost their shirts.

However, there is agreement among Democratic lawmakers, their Republican colleagues, banking industry leaders and the administration on many key points.

There is overwhelming sentiment to repudiate the doctrine that some banks are "too big to fail" because their collapse would endanger the entire banking system. All banks must face "market discipline" to prevent them from making reckless investments with government-guaranteed deposits, Treasury officials say.

There is a consensus as well for changing the way the government handles banks that fail. Deposits in failed banks are rarely paid off directly. Instead, regulators arrange to sell the failed bank or its deposits to another financial institution, thus covering not only insured deposits of $100,000 or less but the deposits of all customers, even those with millions of dollars.

The deposit insurance policy also contributes to costly bank failures by exempting banks from market discipline and encouraging big customers to leave their money in banks that are known to be in trouble.

Administration officials argue that the deposit insurance program cannot be fixed without also fixing other flaws in the banking system. The officials have come up with a plan that ties the two together.

The administration intends to propose that additional banking powers, such as the right to open branches in other states or to sell stocks, be given only to banks that meet the highest capital standards. Capital is the money the bank's owners put up to protect against losses.

Details of the proposal have not been worked out, but the principal one is that banks that exceed minimum standards would be eligible for additional power, while banks that barely meet the standards would have to receive the approval of regulators for any new ventures.

Banks that fall short of required capital levels would be barred from expanding and be subject to new government regulations that would impose tighter rules as their financial condition deteriorated.

Regulators could cut off banks' newly granted right to sell stocks, order them to stop dividend payments or force the sale of non-banking affiliates to bolster the capital position of the insured unit.

These actions would be what the administration calls "risk-based regulation," meant to systematically increase supervision of financial institutions as the government's risk of bailing out the institutions grows.

Meanwhile, the proposal would offer concrete incentives -- in the form of less supervision, cheaper insurance premiums and greater powers -- for banks to maintain strong balance sheets that would be helpful during economic bad times.

Under such a system, the government would step in and seize control of faltering financial institutions before they are completely broke in hope of minimizing the cost to taxpayers and avoiding the debacle that befell the nation's S&Ls.

When banks do fail, customers with uninsured deposits should be required to bear part of the loss, Treasury officials insist.

The officials are looking favorably on a proposal by the American Bankers Association that immediately would reduce the accounts of uninsured depositors by a flat percentage once an institution became insolvent. The loss, based on the average bank failure, could cost uninsured depositors 10 percent to 15 percent of their money.

The proposal would be part of the Treasury's determined effort to "shrink the safety net" by reducing deposit insurance coverage. How else to achieve that goal, however, is unresolved.

The $100,000 deposit insurance coverage level is sacred, Treasury officials now admit after floating trial balloons for reduced amounts.

Treasury officials have rejected proposals to impose a $100,000 payout limit over an individual's lifetime. The officials also have been unable to come up with a practical plan to restrict the number of insured accounts held by an individual.