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LONDON -- The British government announced Tuesday that 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 should also 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.

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said by Spice300 :

The U.K. approach is to bail them out and then split them up.

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The break-up of Northern Rock will see about £10bn of low-risk mortgages and £19bn-£20bn of retail deposits hived off into the “good” part of the bank in preparation for a sale. The government is keen to see this sold to a banking entrant to stimulate competition. The rest of Northern Rock’s mortgage book – totalling about £55bn – plus unsecured loans and Treasury assets will be held in a government-controlled asset company and wound down or sold off. Northern Rock said 90 per cent of the loans that will form part of this business were performing.
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{the European Commission} imposed some constraints on the bank’s ability to write business as a penalty for the state aid it has received. Northern Rock – and any group that wants to buy the bank – will have to keep new lending and retail deposits below a certain threshold until the end of 2011 and ensure that its mortgage rates are not market leading. The government will inject a further £8bn to fund the split.

The constraints will ensure that for two years at least Northern Rock will be a slimmed-down version of its former self. At the height of the property boom in 2007, the bank was writing about 20 per cent of new mortgage lending and its loan book had expanded to £100bn. The balance sheet of the new bank is expected to be about a fifth of the peak size.

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