Risky Banks Would Get Broken Up In Kanjorski Plan

Government regulators will break up institutions whose failure would bring down the entire financial system, under an amendment Rep. Paul Kanjorski will introduce today.

Financial behemoths no longer will become too big to fail and create the kind of havoc that happened to the economy over the past two years, the Pennsylvania Democrat told CNBC in an exclusive interview.

"This really goes back to the concept that corporations now have been allowed to grow to such an extent that they actually are greater than any single government on Earth," Kanjorski said. "This is a fight between corporate megalomania and democratic capitalism."

Kanjorski subsequently told Reuters that the power to determine whether an institution is so big that it could endanger the system will reside with the Financial Services Oversight Council but require presidential consultation.

The concept of too big to fail soared onto the public landscape when Lehman Brothers collapsed in September 2008 beneath the weight of risky mortgage-backed securities in which it invested.

Several other large institutions whose tentacles spread throughout the financial system also teetered on the brink of insolvency during the crisis. Government officials worried that if the firms went down they would bring the entire economy with them.

Kanjorski's amendment will become part of legislation establishing a resolution authority to deal with the too-big-to-fail concept.

JPMorgan Chase CEO Jamie Dimon wrote an opinion piece last week for the Washington Post agreeing with Kanjorski's sentiment that poorly run institutions ought to be allowed to fail.

However, he contended that the government should not base its decisions solely on size.

Those concerns were echoed in a separate CNBC interview with Rob Nichols, president of Financial Services Forum, an industry advocacy group.

Kanjorski Unveils Financial Reform Amendment

"Just saying a bank of any certain size is too big—I think that's just a misguided principle," Nichols said. "There's a very important role that large institutions can play in the United States economy in terms of the size of the loans they can afford and the array of products, the geographic reach."

Kanjorski pledged that mere size won't be the determining factor on whether an institution could get broken up.

"Corporations won't be reined in if we don't find a methodology of doing it," Kanjorski said. "We don't want to rein them in because of their size alone, we want to rein them in if they prove that they could bring down the system, promote great instability not only here but around the world."