Banks must be protected
Retail and investment banking divisions should be more clearly separated, according to an interim report from the Independent Commission on Banking.
The Commission was set up last June in response to the financial crisis and will publish its full report in September.
The interim report calls for a more equal playing field across the retail banks and has recommended ringfencing banks' retail arms from their riskier investment divisions.
Chairman of the commission Sir John Vickers, told the BBC however that total separation was not necessary. He said: "UK retail banking can be protected by its own capital cushion. Other parts of the bank should be allowed to fail. This would lead to additional costs to the banks, some of which would fall on the wider economy."
The Commission claimed that banks had taken 'excessive' risks in the run up to the financial crisis and that taxpayer support for the banks did nothing to encourage them to act more cautiously.
Interim recommendations also want to see banks reserve 10% of their capital to cover potential losses instead of the 7% required by European regulations.
However some commentators have argued that forcing banks to hold more capital could see some banks consider overseas moves.
Iain Anderson, director of Cicero Consulting, explains: "The interim proposals for the UK's systemically significant banks to hold equity of at least 10% - 3% more than the planned Basel III plans is a measure which may well indeed force some UK banks to list in the US or Asia.
"If the cost of capital is set to be a almost a third higher in the UK than in New York, Singapore or Hong Kong, there will be many round the boardrooms of British banks taking a long hard look at other destinations."
At a time when banks are coming under fire for withdrawing from smaller towns and rural communities, the Lloyds Banking Group may also be forced to sell off hundreds of its branches to create fairer competition. The bank currently controls 30% of current accounts in the UK.
It's already selling 600 branches in response to a deal with the European Commission last year.
Releasing a statement in response to the interim report the British Bankers Association said the Commission's proposals will have to be considered alongside existing reforms that are already under way:
"Banks in the UK have already undergone significant change since the global crisis, including significantly increasing their capital and liquidity and establishing resolution plans, to protect depositors and to keep finance flowing, should a bank get into difficulty."