(James Saft is a Reuters columnist. The opinions expressed are his own)

So it can be done after all.

Britain is poised to take tough steps to break up the large banks it rescued, setting it in stark contrast to the United States, which seems set on a policy of shoring up the unfair advantages it grants its too-big-to-fail banks while regulating around the edges.

It is quite a change for Britain, which has a sorry history of self-serving self-regulation in financial services combined with limp and outgunned official control.

Chancellor of the Exchequer Alistair Darling on Sunday told the BBC that Lloyds, RBS and Northern Rock would be partly broken up and assets sold to new entrants into the banking market. Large existing competitors such as HSBC are expected to be blocked from making bids for the assets.

Britain took over Northern Rock after a run on the bank and its rescue of Lloyds and RBS left it with stakes of 43 and 70 percent, respectively.

It is worth noting that if anything Britain is more dependent on its financial services sector than the United States.

Could it be that Britain has determined that a level playing field, strong competition and a lower risk of a crisis might actually make it more competitive internationally? I certainly think so.

It will without doubt improve the situation for the small businesses and individuals that can’t access international capital markets and depend on the banks for access to credit and other financial services.

Before we get all excited and expect the United States to follow suit with Citibank and Bank of America, it is important to recall that Britain’s Labour government is more or less on its death bed and faces an election in 2010 which the bookies and almost everyone else think it is highly unlikely to win.

There is also the matter of the European Union, which has a say over subsidies such as the ones Britain has showered on the banks. RBS said on Monday that it may be forced by the EU to sell more assets than it had planned. Lloyds is also seen likely to raise additional new capital to allow it to stay outside of an asset insurance scheme Britain is running for the banks and which would involve the government taking yet more equity in the participants.

OH WHAT A CONTRAST

The fact remains that Britain and the EU are saying that more competition is needed and taking steps to ensure that the banks which ended up needing state care are broken up. This must have an impact on how other big banks are ultimately treated, even if they did not receive the same level of direct state aid.

The equity buffer that is being required is also remarkable; the banks should end up with core tier one equity of about 10 percent, four times what they were expected to hold before the crisis.

Contrast all of this with the hopefully named Financial Stability Improvement Act of 2009, now wending its way through Congress. As Harvard Business School professor David Moss points out, as currently drafted this bill won’t even allow the systemically important banks it is designed to control be named, a real Monty Python-esque touch.

Think about it: we won’t even be allowed to know the identities of the firms we are potentially on the hook for. Moss points out that this neatly side-steps the idea of taxing too-whatever-to-fail status as a means of encouraging the behemoths to sell up and avoid the costs. The costs remain with the taxpayer, or potentially with a group of big firms after the fact.

The argument the U.S. administration is making, more or less, is that our complex global economy somehow demands that we have complex huge banks. If we don’t allow huge banks to persist, we’ll choke off growth. If we think we can go back to mom and pop banking, we are simply kidding ourselves. And anyway, if the U.S. doesn’t allow it, foreign banks will just scoop up the cream. With Britain and the European Union taking strong steps, that argument is losing traction. And as for complexity, well I’d have to say that the record of complexity in banking is mixed, to be kind, as far as the deal it gives to taxpayers and consumers of banking services. It would be one thing to argue for huge economies of scale for plain vanilla banking processes like clearing, but it is hard to see why that needs to be combined with derivatives and trading.

It would be nice to think the winds are blowing west across the Atlantic, but this is not usually the case.

(Editing by James Dalgleish)

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

– Mark Hannam is a guest columnist, the views expressed are his own. He formerly worked at the Bank of England and Barclays. He is currently chairman of Fair Finance, a microfinance company –

Some banks have come out of the financial crisis in better shape than others. We should encourage them rather than lump them together with the failures.

Public anger at the recent failings of many of our leading banks, while justified, is not a sound basis for future policy. The temptation facing policy makers — that of failing to distinguish between better capitalized, better managed banks and under-capitalized, poorly managed banks — should be avoided.

The period leading up to the financial crisis was characterized by an insufficient differentiation of risk in the financial markets. Across many asset classes risk premia were compressed to such an extent that the difference in price between low-risk and high-risk assets was insufficiently wide.

Prices are signals and in the past few years they have signaled incorrectly.

Public policy that treats all banks as if they were the same perpetuates the problem of erroneous signaling: JP Morgan does not have the same problems as Citibank; Barclays’ prospects are not identical to those of RBS.

The stress tests in the U.S. — however crude and dubious in methodology — are likely to demonstrate this. We can and should distinguish between those banks that benefit from general government support for the financial system and those that require specific government intervention to remain solvent.

Last autumn, when Lehman Brothers collapsed, there were legitimate concerns that the entire financial system might disintegrate, causing sustained and substantial damage to the global economy. At that moment blanket government guarantees covering all market participants were welcome because they were necessary. That moment has now passed.

Today’s problem is not contagion, but the shortage of beds available for restorative surgery. The public purse isn’t bottomless. We cannot be sure there will be no further fatalities but we do know which banks are on the critical list and which are not.

It makes sense to clear the walking wounded out of the hospital, even though they are not yet fully recovered.

We should welcome Goldman Sachs’ and JP Morgan’s desire to pay back money to the TARP scheme, and Barclays’ willingness to sell assets to improve its capital position without taking additional government funding.

These banks have some way to go before they make a complete recovery, but at least they are making progress.

Those banks that have survived the past two years with less damage than their peer group are those that are cleverer or luckier than the average. They should be allowed to take advantage of the opportunities that the economic situation offers. They are our best hope for a return to normal activity in the financial markets, which in turn will initiate the slow process of economic recovery.

The news that some banks were able to make substantial profits in the first quarter has provoked some predictable venting of spleens: Goldman Sachs dares to be successful again!

Last year’s schadenfreude has metamorphosed into this year’s ressentiment. Whether bankers are losing vast sums of money or making vast sums of money, there will always be people who love to hate them. To indulge such hatred, at the cost of a longer and deeper economic recession, is pure adolescent posturing.

The events of the past two years have demonstrated beyond doubt that all banks depend upon governments (and therefore taxpayers) as their ultimate guarantors. No bank can avoid the consequences of systemic risk so all banks should pay for protection against them.

In the future these premia are likely to be higher than in the past and should be calculated according to the level of risk posed to the public purse.

Increased revenue from bank licensing should be invested in the reform financial regulatory system, which has demonstrated itself to be inadequate for its task. There are plenty of failed banks still to sort out and the process of bank supervision requires substantial redesign.

We need better quality regulators; but we will probably end up just with a bigger quantity of them. One lesson from the financial crisis that governments appear unwilling to learn is that size gives no indication of ability.

The stronger banks want to avoid the full embrace of the state. They appear confident that they can survive better without it. Some of them will be profitable this year. This is one of the few pieces of good news to come out of the financial markets of late.

As the Romans used to say, pecunia non olet: money does not smell. So then, two cheers for the walking wounded!