An interim report by the Independent Commission on Banking (ICB) recommends that retail banking should be clearly "ring-fenced" from investment activities.

"Too much risk taking" had been encouraged, according to the report, because of an implicit guarantee that tax-payers will bail them out.

The ICB recommends that banks increase their own cash reserve up to 10 per cent -- higher than current European regulation -- in order to prevent any further lack of liquidity.

"UK retail banking can be protected by its own capital cushion" said Sir John Vickers, chairman of the ICB, adding that "other parts of the bank should be allowed to fail".

Bankers and members of the financial sector said that these measures would imply new and heavier costs for banks. However, the report says that the prospect of "materially reducing the probability and impact of financial crises could easily reduce the impact of these costs".

It also suggested that more competition was necessary in the retail sector and encouraged Lloyd's Banking Group to continue its current process of selling over 600 branches. The ICB will submit its final report in September. The government has no obligation to follow its advice.