These moderate proposals may just be acceptable to both Coalition parties

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The Conservatives and Liberal Democrats avoided an immediate row over the future of Britain's banks yesterday as they both welcomed the interim report of the Independent Commission on Banking.

Before last year's general election, the Liberal Democrats favoured the total separation of the banks' high street and investment banking arms. Although the Vickers commission stopped short of proposing that, Liberal Democrat ministers admitted privately they were unlikely to persuade George Osborne and David Cameron to go further than yesterday's blueprint.

The challenge now for Vince Cable, the Business Secretary, who has led the charge for complete separation, will be to prevent Sir John Vickers' plan being watered down – either by the Commission in its final report in September or by the Government refusing to implement the interim report in full. Battle has been postponed until the autumn.

Yesterday Mr Cable reacted cautiously, saying: "I think it is too early to give a full response to it but it does deal in a very thorough way with how we tackle this problem of banks that are too big to fail and on a taxpayer guarantee. I'm pretty sure we will come up with a solution to that problem thanks to this report." Suspicions remain among Liberal Democrats that the inevitable lobbying campaign against the proposals by the banks may turn the heads of senior Treasury officials worried about putting Britain's banks at a disadvantage with foreign competitors. Having achieved less than they wanted on curbing this year's bonuses, some Liberal Democrats wonder whether Mr Cameron and Mr Osborne will have the stomach for a fight with the banks.

All the same, there was more in the Vickers report for the Liberal Democrats to cheer than some had feared – such as the call for Lloyds to sell off more of its branches. Allies of Mr Cable hope Sir John is playing a clever political game, giving the banks space to state their objections now so he can knock them down in his final report.

Senior Tories said criticism by the banks the Commission had gone too far and by trade unions and left-wing groups that it had not gone far enough suggested the Commission had "got it about right". Neal Lawson, chairman of the democratic left organisation Compass, said the Vickers report had failed the "acid test", adding: "At the moment banks are too big, too powerful and behave too recklessly because they are thought to be too big to allowed to fail. Nothing short of cutting down these banks down to size can prevent another catastrophic economic collapse." Mr Osborne, who was embroiled in a turf war with Mr Cable over responsibility for the banks last year, adopted a conciliatory approach towards the Liberal Democrats.

He said "I think that the decision we took to set up the Commission has been vindicated today."

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