U.S. lawmakers focus on size of big financial firms

WASHINGTON (Reuters) - Two key U.S. lawmakers on Tuesday endorsed the idea of the government restricting not just the risks taken by big financial firms, but also their sheer size, echoing proposals being heard in Europe.

The chairmen of two powerful U.S. House of Representatives panels signaled a willingness among Democrats in Congress to assert regulatory power to break up large firms and prevent threats to economic stability from financial institutions becoming "too big to fail."

That could have major consequences for financial giants ranging from Goldman Sachs (GS.N) and JPMorgan Chase (JPM.N) to Morgan Stanley (MS.N) and Bank of America (BAC.N), all prominent survivors of last year's financial crisis.

The views of House Financial Services Committee Chairman Barney Frank and capital markets subcommittee Chairman Paul Kanjorski will be crucial to the ongoing effort by the Obama administration to tighten bank and capital market regulation

A bill debated on Tuesday by Frank's committee would empower regulators to reduce the size of troubled financial firms, Frank told reporters after a committee work session.

Kanjorski said: "We have to find a way to limit them. ... We are preparing an amendment to give authority to reconstruct organizations that are determined to be too large to fail."

The Obama administration last week proposed asserting a new level of government power to manage the risk and size of financial firms, but Frank and Kanjorki's comments appeared to place a new emphasis on size itself.

The idea of holding financial firms to a manageable size is also gaining favor in Europe.

The two largest UK retail banks -- Royal Bank of Scotland (RBS.L) and Lloyds Banking Group (LLOY.L) -- secured more government aid on Tuesday and agreed to sell branches and businesses to appease European Union competition concerns over state aid.

EU regulators are considering measures to force banks across Europe to sell assets and sometimes even to break up to compensate for massive state aid they have received.

REGULATORY OUTCOME STILL UNKNOWN

But even as lawmakers took steps on Tuesday, President Barack Obama's push for financial regulation reform has a long way to go and its final outcome is unknown.

Delays announced by Frank on Tuesday would likely kill any chances Congress will finish financial regulation reforms this year, a goal set by Obama.

Frank said that instead of voting this week on the bill as planned, his committee is targeting a mid-November decision. He said a vote by the full House may not come until early December, two to three weeks later than planned.

More than a year since the collapse of Lehman Brothers triggered a severe credit crunch, financial regulation is little changed and major firms appear to be getting back to business usual.

Analysts, however, do expect major changes will come, with politicians unable to ignore voter anger over massive taxpayer bailouts of firms such as AIG (AIG.N) and Citigroup (C.N).

As the House debated, an aide to U.S. Senate Banking Committee Chairman Christopher Dodd said on Tuesday he could release a draft financial reform bill as soon as next week.

The Dodd bill could be debated and possibly voted on "in full committee as early as the week of November 16," Dodd spokeswoman Kirstin Brost told Reuters.

Senator Richard Shelby, the top Republican on Dodd's committee, on Monday made it clear that he still differs sharply with Dodd on several key reforms, suggesting a lengthy Senate debate lies ahead.

An administration official on Tuesday called the impending Dodd bill a good framework that is broadly similar to proposals moving ahead in the House under Frank's management. but said it was unclear whether the bill would gain any Republican support.

Unlike Frank, who can move bills in the Democrat-dominated House, Dodd has to deal with a narrowly divided Senate, making the positions of Shelby and other Republicans pivotal.

In a related matter, Frank also told reporters he would favor naming Elizabeth Warren, the head of the Congressional Oversight Panel charged with keeping an eye on the government's $700 billion bailout of the financial system, to head a new Consumer Financial Protection Agency -- another part of Obama's sweeping financial reform plan.

(Additional reporting by Rachelle Younglai and Karey Wutkowski, with Huw Jones, Clara Ferreira-Marques and Steve Slater in London; Editing by Leslie Adler)