November 6, 2009 / 5:00 PM / 10 years ago

UPDATE 2-Big bank "break-up" idea gains ground in Congress

* Independent Senator Sanders introduces break-up bill

* Legislation also under consideration in House

* Sanders would give Treasury 90 days to identify firms (Adds Kanjorski, Frank, Miller comments, background, byline)

By Kevin Drawbaugh

WASHINGTON, Nov 6 (Reuters) - An independent U.S. senator on Friday introduced a bill that would give the government the power to identify and break up financial firms that are “too big to fail,” an idea that is catching on.

“If an institution is too big to fail, it is too big to exist,” said Senator Bernie Sanders in a statement.

“We should break them up so they are no longer in a position to bring down the entire economy,” he said.

Sanders is an independent outside the U.S. political mainstream. But he is not the only one looking at break-ups.

Representative Paul Kanjorski, the Democratic chairman of the capital markets subcommittee in the U.S. House of Representatives, is working on a break-up power amendment.

It would give a new government systemic risk council break-up power, with clearance from the president.

“It’s the natural action of capital to grow and exceed. Now we’re going to contain it,” Kanjorski told CNBC television.

He said large banks oppose his amendment because it would threaten them. But, he said, mid-sized and smaller financial institutions would be helped by it because they would be better able to compete if mega-firms were downsized.

“When the people’s money is being used to bail out these large companies ... We certainly have to have someone to tell them what to do in order to save them,” he said.

House Financial Services Committee Chairman Barney Frank said earlier on CNBC that a bill he is working on, which Kanjorski wants to toughen, would let a systemic risk regulator “break up” risky financial firms.

Elsewhere this week, the two largest UK retail banks — Royal Bank of Scotland (RBS.L) and Lloyds Banking (LLOY.L) — got more government aid 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.

GOAL IS STABILITY

In the aftermath of the worst financial crisis in decades, nations are trying to determine what to do about banks and financial firms that are so large that their failure could threaten the stability of the global financial system.

The goal is to prevent another debacle like last year’s when Lehman Brothers collapsed, triggering a credit crisis and huge taxpayer bailouts of AIG (AIG.N), Citigroup (C.N), Bank of America (BAC.N) and others.

President Barack Obama has proposed regulating large firms’ risk-taking much more tightly to prevent them from failing, while setting up new protocols for managing failure if things go wrong.

Another approach, which Sanders and others back, would be to prevent the firms from getting so big in the first place.

Sanders’ legislation would give Treasury Secretary Timothy Geithner 90 days to list commercial banks, investment banks, hedge funds and insurers that he deems too big to fail.

The bill defines that as “any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial government assistance.”

Policy analyst Paul Miller of FBR Capital Markets said in a research note: “Keep in mind that this legislation is currently in its infancy, and Congress has a number of difficult questions to answer before anything can move forward.” (Reporting by Kevin Drawbaugh; Editing by Kenneth Barry)

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