WASHINGTON – Momentum is growing in the United States and abroad to deal with the problem of financial institutions deemed too big to fail by breaking them up so they’re not so big in the first place.

“The era of the big bank is over,” said Simon Johnson, a professor at the Massachusetts Institute of Technology and former chief economist at the International Monetary Fund.

The new proposal moving through Congress carries important ramifications for the economy’s future and the ability of U.S. financial institutions to compete abroad. Critics point out that only a handful of the world’s largest financial companies are based in the United States, and they say megacorporations need megabanks to meet their needs.

Nevertheless, the call to limit the size of financial companies has come from former Federal Reserve Chairmen Alan Greenspan and Paul Volcker, as well as some prominent economists. Europeans are mulling a similar move, while the Fed’s British counterpart, the Bank of England, this month said it would force three bailed-out behemoths – Royal Bank of Scotland, Lloyds Banking Group and Northern Rock – to downsize.

Seizing on that momentum and the continued outrage over Wall Street bailouts and bonuses, a House committee last week voted to give U.S. regulators the power to break up large financial institutions that pose a “grave threat to the financial stability or economy of the United States.”

The plan, part of an overhaul of financial regulations moving through Congress, goes much further than the so-called “resolution authority” the Obama administration has requested.

Under that proposal, the government would be able to take apart large companies only if they were are on the brink of bankruptcy and were so interconnected that their failure could cause economic chaos. That was the case with American International Group last year before the Federal Reserve bailed it out.

But many lawmakers say the government needs the ability to break up companies engaged in risky behavior well before they get to the point of collapse.

“The American mind is asking … Are we going to allow institutions to put their lives, their children’s lives, the entire country at risk? Or can we take preventive action to prevent this risk?,” said Rep. Paul Kanjorski, D-Pa., who wrote the proposed break-up provision.

The concept is simple, supporters said: The bigger you are, the harder you fall.

“When small guys screw up, we shut them down,” said Johnson, the former IMF economist, noting that more than 120 U.S. banks have failed this year. “We’re good at managing failure. What we can’t do is deal with the failure of big guys.”

Johnson said there been no societal gain from the dramatic growth of Goldman Sachs and other financial companies over the past decade, and there’s no reason to believe that regulators will become more effective in reining in risky behavior.

“If you’re a big, trillion-dollar bank, the chances are the president will not want you to go through bankruptcy resolution,” Johnson said. “If it’s an $80 billion or $100 billion bank, the consequences will be more manageable.”

Four U.S. bank-holding companies have more than $1 trillion in total assets – Bank of America, JP Morgan Chase, Citigroup and Wells Fargo. Kanjorski’s proposal would require regulators to give special attention to the 50 largest financial institutions, those with more than $17 billion in assets.

Under that proposal, a forced divestiture of assets worth more than $10 billion could not take place without the Treasury secretary’s approval, and a divestiture of assets of more than $100 billion would require consultation with the president.

But it oversimplifies the problem to say that simply being big is bad or risky, said Rob Nichols, president of the Financial Services Forum, a trade group of the chief executives of the 18 largest U.S. financial institutions.

The group supports tighter regulation, such as requiring large companies to hold more capital to cushion against losses. And it largely favors the administration plan to allow the government to seize and dismantle companies near failure to avoid the potential chaos of bankruptcy.

But unless the entire world cracked down on the size of their financial institutions, such a move by the U.S. would put the country at a disadvantage, Nichols said. Even if the United Kingdom and the European Union followed suit, huge Asian banks would step in, he said.

“Boeing, Caterpillar, Coca-Cola, Microsoft … they can’t have their financial needs met at the Bank of Burbank.

Most Republicans oppose giving the government break-up power, saying it would violate the Constitution and could lead to the dismantling of non-financial institutions, just as General Motors and Chrysler were bailed out.

Decisions also could be made for political reasons, said Sen. Judd Gregg, R-N.H., such as breaking up Coca-Cola because soda can be unhealthy or Wal-Mart because its workers aren’t unionized.