Downsizing Banks Deemed Too Big to Fail

By William Underhill and Matthew Philips 

The Brits are broken. At least their big, bailed-out banks are. This month, under pressure from EU Competition Commissioner Neelie Kroes, three of Britain's biggest banks, all of which got lavish government support last year, learned they will either be downsized or split up as part of their restructuring efforts. Lloyds Banking Group and Royal Bank of Scotland, which received a combined $64 billion in government aid last fall, will have to sell off hundreds of branches and billions in assets, including insurance and Internet banking units. Mortgage lender Northern Rock, which was nationalized last year, has agreed to be split in two. The intended result: smaller, healthier banks that won't be too big to fail the next time disaster strikes. 

But while the U.K.'s biggest banks are slimming down, their American counterparts remain behemoths. Four U.S. banks--JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America--control nearly 40 percent of the country's deposits, according to financial Web site the Motley Fool. But there's an effort in Congress to give U.S. regulators the same kind of chopping powers being wielded in Europe. An amendment added to the House financial-reform bill on Nov. 18 would empower federal regulators to dismantle financial firms deemed too big to fail, before they actually do. The amendment's sponsor, Rep. Paul Kanjorski, met with EU regulators this summer and modeled the bill on their efforts. In an interview with newsweek, Kanjorski says, "It essentially gives us the power to amputate the leg before the infection kills the entire body."