|Bank shares were up in early trading following the release of the report [Reuters]
A British commission has recommended that the country's banks ring fence their retail operations from investment activities in an effort to avoid another financial crisis.
In a preliminary report released on Monday, the Independent Commission on Banking (ICB) said such a move would protect taxpayers from the sector's risk-taking arm without forcing the banks to split into separate entities.
"We believe that you can get adequate protection of the retail side with lower cost to the system as a whole with the retail ring- fence idea," John Vickers, chairman of the commission, told BBC radio.
The commission, which was tasked by the government last June to review the country's banking system, also said the retail operations of British banks should hold greater resources of capital in case of any future economic crisis.
The amount of capital suggested - 10 per cent - is three per cent above EU regulations agreed last year.
The global financial crisis hit Britain's banks hard - resulting in the nationalisation of Northern Rock and state rescues of the Royal Bank of Scotland and Lloyds Banking Group.
The preliminary report aims to find ways to avoid another catastrophic failure of a financial system dominated by a few large banks often considered to be too big to be allowed to fail.
The commission, which will make its final recommendations in September, said it was considering "forms of retail ring-fencing under which retail banking operations would be carried out by a separate subsidiary within a wider group," which would still allow some capital transfers within the organisation.
Simon Gleeson, a financial services partner at the law firm Clifford Chance, told the Reuters news agency that there could be EU legal challenges to the British plan but said that the UK would probably seek to find middle ground.
"It is highly unlikely that the UK would act in direct contravention of its treaty obligations. The interesting question is whether the UK can sell this to Brussels as an EU policy initiative," he said.
Initial responses to the report were positive in the markets, with Lloyds, Barclays and Royal Bank of Scotland shares up in early trading.
The British Bankers Association did not react to specific proposals, but said the commission's report would have to be considered in the context of reforms already under way in national and international regulation.
"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,'' the association said.