Financial groups' size may be limited

WASHINGTON — Momentum is growing in the United States and abroad to deal with the problem of financial institutions deemed "too big to fail" by breaking them up so they're not so big in the first place.

"The era of the big bank is over," said Simon Johnson, a professor at the Massachusetts Institute of Technology and former chief economist at the International Monetary Fund.

A new proposal moving through Congress carries important ramifications for the economy's future and the ability of U.S. financial institutions to compete abroad. Critics point out that only a handful of the world's largest financial companies are based in the United States, and they say mega-corporations need mega-banks to meet their needs.

Nevertheless, the call to limit the size of financial companies has come from former Federal Reserve chairmen Alan Greenspan and Paul Volcker, as well as some prominent economists. Europeans are considering a similar move, while the Fed's British counterpart, the Bank of England, this month said it would force three bailed-out behemoths — Royal Bank of Scotland, Lloyds Banking Group and Northern Rock — to downsize.

Seizing on that momentum and the continued outrage over Wall Street bailouts and bonuses, a House committee last week voted to give U.S. regulators the power to break up large financial institutions that pose a "grave threat to the financial stability or economy of the United States."

The plan, part of an overhaul of financial regulations moving through Congress, goes much further than the so-called "resolution authority" the Obama administration has requested.

Under that proposal, the government would be able to take apart large companies only if they are on the brink of bankruptcy and are so interconnected that their failure could cause economic chaos. That was the case with American International Group last year before the Federal Reserve bailed it out.

But many lawmakers say the government needs the ability to break up companies engaged in risky behavior well before they get to the point of collapse.

The concept is simple, supporters said: The bigger you are, the harder you fall.