The Independent Commission on Banking (ICB) today issued its interim report, in which it, as expected, called for the "ring-fencing" of retail banks from investment banks.

While the ICB did not call for the splitting of retail and investment banking arms, it has said that retail and investment operations should be operated by separate subsidiaries in the same parent group.

In theory this would mean retail banks would be safe should the investment division find itself in another financial crisis. In the event of such a crisis the investment arm could be sold or allowed to fail, while retail operations could continue as normal.

In addition to its "ring-fencing" proposal the ICB said that more competition in the retail banking sector is needed, partly by Lloyds Banking Group having to sell off even more branches.

Lloyds Banking Group is already in the process of selling 600 branches.

The interim report also said that banks should keep higher capital reserves of 10 per cent, significantly higher than the seven per cent being stipulated by new regulations from the European Union.

The ICB, which was set up by the Coalition government, is to give its final report in September.

Keith Bowman, Equity Analyst at Hargreaves Lansdown Stockbrokers, commented, "An early assessment suggests that the report brings few surprises, with a possible exception being the kick back against the Lloyds HBOS merger. 'Ring fencing' is to become the order of the day, with capital cushions being bolstered and contingency plans to implement a potential wind down of a business drawn up.

"Nonetheless, the backdrop and underlying problem from a regulator's perspective is that banking has become a global business, a development hindering aggressive individual country action.

"In all, taking the perspective of the average consumer, the interim report would appear to be somewhat disappointing. Rising financial capital cushions are likely to paid for by increased banking charges, whilst the rise of an army of new alternative banks still looks to be a lifetime away. Furthermore, with UK buyers of Lloyd's surplus branches likely to be few and far between, tax revenues from those operations could soon be winging their way overseas."

European Union