Banks face being broken up to make them safer

Sir John Vickers, Chairman of the Independent Commission on Banking (ICB), is reportedly ready to defy the big banks and impose tougher than expected ring-fencing of their retail and investment banking activities when he presents his report on September 12.

Now in its final stages of completion – the main text is thought to be compete – the Vickers Commission's proposals are likely to spark renewed anger among the banks, and increasing talk of them moving away from the UK.

But the tough new line is set to be welcomed by Business Secretary Vince Cable. He has long campaigned for a legal separation of the functions of the banks, to eliminate their "too big to fail" problem, blackmailing taxpayers into rescuing them when they run into difficulties.

Sir John's approach might also find favour in the Bank of England. Governor Sir Mervyn King has made little secret of his scepticism about the benefits of so-called "universal" banking.

Conversely, a tougher set of recommendations might not be so pleasing to the Chancellor, George Osborne. In his Mansion House speech in June, Mr Osborne went unusually far in endorsing the interim report of the Vickers Commission, which proposed a lighter ring-fencing than the one that is now rumoured to be approaching the desks of Treasury officials.

Having supported the first set of ideas so enthusiastically, Mr Osborne may now find it tricky to extricate himself. But the ultimate decision on the future of UK banking rests with the Government. He may find allies at the Prime Minister's residence for his unwillingness to take risks with a major export earner and provider of jobs.

Senior bankers have warned that any new ring-fenced banking structure could drive up the cost of borrowing to British households and businesses. The bankers claim that this would then reduce the UK's international competitive advantage.