Britain — unlike U.S. — moves to break up bailed-out banks

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LONDON — The British government announced Tuesday it will break up parts of major financial institutions bailed out by taxpayers, highlighting a growing divide across the Atlantic over how to deal with the massive banks that were partially nationalized during the height of the financial crisis.

The British government — spurred on by European regulators — is forcing the Royal Bank of Scotland, Lloyds Banking Group and Northern Rock to sell off parts of their operations. The Europeans are calling for more and smaller banks to increase competition and eliminate the threat posed by banks so large that they must be rescued by taxpayers, no matter how they conducted their business, in order to avoid damaging the global financial system.

The move to downsize some of Britain's largest banks comes as U.S. politicians are debating whether American banks also should be required to shrink. The Obama administration has maintained that large banks should be preserved because they play an important role in the economy and that taxpayers instead should be protected by creating a new system for liquidating large banks that run into problems. But Britain's decision already is being cited by a growing chorus of experts, including prominent bankers and economists, who want the United States to pursue a similar approach.

"We still need to see exactly which parts the (British) banks will need to sell off to judge whether the goal of having smaller banks is really achieved," said Richard Portes, an economics professor at the London Business School. "But there are lessons here for the United States. The supposed economies of scale of massive financial institutions are outweighed by the difficulties in controlling risk inside them."

The changes amount to a massive restructuring of the British financial system, among the hardest-hit by the global crisis, that could result in what the government has described as the creation of three new commercial banks. The Royal Bank of Scotland — now 70 percent owned by British taxpayers — announced Tuesday it would sell off 318 branches in England and Wales, as well as sell its NatWest brand in Scotland, RBS Insurance, and Global Merchant Services, a credit-card payment business, as a result of regulator demands. The sell-offs would pave the way for tens of billions of dollars more in previously announced cash injections from the governments.

Demands that more state aid be tied to downsizing appeared to be emanating most strongly from Brussels, where the European Commission has been pressing the British to shrink its massive banks. In a related move, RBS also announced plans Monday to trim 3,700 jobs, or 14 percent of its workforce, across the United Kingdom.

Lloyds, now 43 percent owned by British taxpayers, said it will sell at least 600 branches, including its TSB brand in Britain, the Cheltenham & Gloucester mortgage company and an online financial business, Intelligent Finance.

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