"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 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 from some prominent economists. Europeans are mulling 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 this month voted to give U.S. regulators the power to break up large financial institutions whose failures 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 were are on the brink of bankruptcy and were so interconnected that their failure could cause economic chaos. That was the case with American International Group Inc. 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 House measure, by Rep. Paul E. Kanjorski (D., Pa.), would require regulators to give special attention to the 50 largest financial institutions, those with more than $17 billion in assets each.
But it oversimplifies the problem to say that simply being big is bad or risky, said Rob Nichols, president of the Financial Services Forum, a trade group of the chief executives of the 18 largest U.S. financial institutions.
The group supports tighter regulation, such as requiring large companies to hold more capital to cushion against losses. And it largely favors the administration plan to allow the government to seize and dismantle companies near failure to avoid the potential chaos of bankruptcy.
But unless the entire world cracked down on the size of their financial institutions, such a move by the United States would put the country at a disadvantage, Nichols said.
"Boeing, Caterpillar, Coca-Cola, Microsoft . . . they can't have their financial needs met at the Bank of Burbank," he said. "They need these large global financial institutions."
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