Britain could force banks to fully separate their retail operations from riskier areas if lenders fail to implement a "ring-fence" that sufficiently safeguards taxpayers or improves behaviour, the architect of the plan said on Monday.
John Vickers headed up the Independent Commission on Banking (ICB), which recommended UK banks shielded or "ring-fenced" their retail operations from riskier investment banking activities but stopped short of advocating a total separation.
Vickers told MPs that he currently saw no need for a full break-up, saying it would be expensive and might not produce any positive benefits. However, he said the option should be kept "in reserve" to help ensure the plan works.
"If the industry turned out to be unreformable then it's possible that total separation would turn out in due course to be the better step to take," Vickers told the Parliamentary Commission on Banking Standards on Monday.
Former Barclays head Martin Taylor, who co-authored the ICB report, told the commission last month that banks could leave Britain if they were asked to implement a full separation.
HSBC chairman Douglas Flint last week told the inquiry his bank had deferred a decision on whether to leave London until it had certainty over future regulation.
Dominic Griffiths, head of the banking and finance group at law firm Mayer Brown, said the threat of a full break-up was unnecessary.
"A workable and robust ring fencing system can be created within the existing financial and banking sector," he said.
Vickers also said he was concerned the government had watered down his recommendations and should impose stricter rules on banks' funding requirements.
He said the government should stick to his recommendation that larger UK retail banks should be prevented from leveraging their capital by more than 25 times. The government is planning to set the so-called "leverage cap" at 33 times.
Vickers said Britain was "a quarter or a third along" its path to reforming the structure of the banking industry, and when tougher capital, liquidity and other changes come in industry will be "about 80 percent" through its reform agenda.
Most of Vickers' proposals are set to be introduced, but some are not or have been adjusted. He raised five areas that differed from his proposals, notably the leverage cap.
He said simple derivatives products such as interest rate and foreign exchange risk management products for small business customers should not be allowed within the retail arms.
Draft UK legislation last month failed to give clear guidance on which activities a ring-fenced bank will be allowed to engage in.
(Reporting by Matt Scuffham and Steve Slater; Editing by David Cowell)