U.S. big banks need to shrink: FBR's Miller

Paul Miller, Managing Director and Head of Financial Institutions Research, speaks at the Reuters Global Finance Summit in New York, November18, 2009.

NEW YORK (Reuters) - A U.S. legislative proposal to give regulators power to break up financial firms that pose a risk to economic stability is "a good thing," a leading bank analyst said on Wednesday.

Paul Miller, an analyst with FBR Capital Markets, said big banks in general are bad for the overall economy because they do not allocate credit well, especially to small businesses.

"I think eventually the big banks get broken up in one way or another," Miller said at the Reuters Global Finance Summit. "It's still an extreme position, but it's building consensus probably faster than most people think."

Paul Kanjorski, the Democratic chairman of the House Capital Markets Subcommittee, on Wednesday unveiled a summary of his proposal that would give break-up power to a Financial Services Oversight Council.

His proposal is an amendment to a larger bill that is working its way through Congress to overhaul financial regulation. Other initiatives include restructuring the bank regulators and creating a new consumer agency to police financial products.

Miller said he is not sure Kanjorski's proposal will make it into the final legislation, possibly because of the amount of money financial firms will pay to fight it.

He said simply raising capital requirements and stricter regulations for the biggest financial firms will cause them to voluntarily shrink because the new rules will limit their profitability.

"I think Jamie Dimon is going to throw his hands up one day and say break them up," Miller said about the chief executive of JPMorgan Chase (JPM.N), one of the nation's largest financial firms.

Miller said he does not buy the argument that banks need to be big to compete globally because there is little benefit to being like a European bank or an Asian bank.

And he said there is little benefit to big banks, in general.

"Big banks don't allocate credit effectively to the middle markets, they do it on national basis," Miller said. "Credit will be tougher to get for the small business man if 80 percent of the lending or 50 percent of the lending is controlled by four institutions. You're already seeing it happen today."

(Reporting by Karey Wutkowski; editing by John Wallace, Dave Zimmerman)