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British government moves to downsize bailed-out U.K. banks

Other prominent financial experts want the government to limit the size of commercial banks, for example through penalties that would give smaller banks a competitive advantage. Investors are already offering large banks much better borrowing rates than their smaller rivals because they believe U.S. regulators won't let the big firms fail.

The three largest U.S. banks, Bank of America, J.P. Morgan Chase and Wells Fargo, together control about a third of the nation's deposits and are the dominant providers of financial products including mortgage loans and credit cards. All three companies also play major roles on Wall Street, investing and helping companies raise money. Proponents of downsizing argue that such behemoths can take outsize risks, knowing the government must catch them if they fall.

The Obama administration has pushed the most troubled large bank, Citigroup, to sell operations to improve its financial prospects, but it has declined to place similar pressure on healthier banks, arguing in part that the government is ill-suited to make management decisions.

The British plan still could have an immediate impact of a different kind if RBS is forced to sell its U.S. retail banking subsidiary, Citizens Bank, which ranks as the nation's 10th-largest retail bank, with about $100 billion in deposits.

Staff writers Binyamin Appelbaum and David Cho in Washington contributed to this report.

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