WASHINGTON — Government regulators approved a sweeping new set of rules for the nation's biggest banks that ban them from the kind of ultra-high-risk trading that nearly collapsed the world's financial system.

Despite a fierce lobbying effort to prevent the new measure, five of the nation's top regulatory agencies on Tuesday approved the final version of a key component of the Dodd-Frank financial overhaul law. The so-called Volcker rule, named after former Federal Reserve Chairman Paul Volcker, prohibits banks from trading for their own profit rather than on behalf of customers.

The measure highlights a new era of stiffer oversight as emboldened regulators flex their muscles. The stricter-than-expected rule comes amid a barrage of costly government investigations into the financial industry, and as securities regulators increasingly push to extract admissions of wrongdoing from big firms.

"Big banks lost," said Mark Williams, a former Fed bank examiner who now teaches at Boston University. "Wall Street aggressively fought the Volcker rule."

The rule generally prohibits federally insured banks' ability to bet in risky investments such as private equity and hedge funds. Private equity funds buy companies and turn them around before selling them, while hedge funds often employ complex trading strategies. These investments have proved highly profitable in the past, but are also dicey because of their opaqueness.

Wall Street's biggest banks have taken steps to get out of those businesses in anticipation of the new restrictions. But the version of the rule adopted Tuesday goes a step further than the financial industry had hoped.

It narrows loopholes that would allow banks to make other investments that critics argued could essentially lead to short-term "proprietary trading." Such wagering uses the firm's money, rather than a client's.

"The Volcker rule will make it illegal for firms to use government-insured money to make speculative bets that threaten the entire financial system, and demand a new era of accountability from CEOs who must sign off on their firms' practices," President Obama said in a statement.

The rule goes into effect in April but banks have until July 2015 to comply.

Another major focus of the rule concerns how banks could buy and sell securities as a way to hedge risks on their balance sheet. This is considered a common practice on Wall Street that helps banks make their balance sheets a bit more safe from dramatic market movements. But regulators have long been worried that over-aggressive traders could disguise complicated risky bets as prudent hedging as a way to score profits.

The clampdown on hedging gained steam last year after JPMorgan Chase & Co. suffered more than $6 billion in losses from positions by a trader who was known as the "London Whale" for his oversized hedges. The embarrassing stumble drew glaring media exposure for the nation's largest bank.

Now the Volcker rule forces banks to continually monitor and adjust hedging strategies to ensure they don't morph into riskier bets that could blow holes in their balance sheets. Under new requirements, the institutions will also have to document rationales for hedges.

Fed Gov. Daniel Tarullo, who heads the agency's bank supervision and regulation committee, said the "Whale" episode provided "a real-world example of what should not happen in a banking organization."

While proprietary trading is now generally banned, the rule will still allow banks to buy stocks and bonds in a practice known as market-making. Banks buy these investments in anticipation that clients will at some point want them.

But regulators worried that firms could take outsize and potentially dangerous positions for their own profits. Under the rule, banks' trading desks would not be allowed to hold investments that exceeded "the reasonably expected near-term demands of customers."

Banks will now be required to keep records to back up their positions, and chief executives will be required to sign off on their firms' compliance.

They are also being asked under the new rule to structure employee compensation so that it does not "reward or incentivize" engaging in prohibited proprietary trading practices or expose the bank "to excessive or imprudent risk." But how the provision will work in practice is unclear.

Sens. Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.), who pushed for the Volcker rule's inclusion in the 2010 financial reform law, said they were reviewing the final version but early indications were that it was tougher than what regulators originally proposed more than two years ago.

The Volcker rule "was intended to change the culture and practices at our nation's largest financial firms, to prevent Wall Street and the big banks from making swing-for-the-fences bets that put depositors and taxpayers at risk," Merkley and Levin said in a joint statement. "The regulators have taken a serious step forward in mandating critical changes."

Wall Street and business groups were quick to voice their unhappiness with the final rule. They argued that regulators could increase the costs of doing business, as well as hinder growth and job creation. The Securities Industry and Financial Markets Assn. said it remained concerned that an overly restrictive Volcker rule would "inflict serious harm on our nation's economy and American savers."