Possible reforms to Britain's banks are unlikely to include a formal break-up of the top lenders, the head of a government-backed body probing the sector in the wake of the credit crisis said on Saturday.
Britain set up the Independent Commission on Banking (ICB) last year to examine a possible shake-up of the sector following the crisis, which saw top banks such as Royal Bank of Scotland and Lloyds needing bailouts.
Sir John Vickers, who heads up the ICB, said that while the ICB was still examining ways to separate the different activities of the country's top banks, it was unlikely to support narrow bank models over diversified, bigger groups.
Oxford University academic Vickers told a conference at the London Business School that the ICB was unlikely to favor radical forms of narrow or limited purpose banking.
Despite calls from politicians to cull the investment banking industry, many industry members and analysts have said it is unlikely that British banks will ultimately be forced into a full break-up.
Most universal banks, with activities ranging from trading to retail banking, proved stronger than many narrow lenders during the crisis, such as mortgage and retail specialist Northern Rock which nearly collapsed and had to be nationalized.
The British Bankers' Association welcomes the fact that Sir John rules out recommending narrow banking' and that he is not advocating the break up of the banks, the BBA said in a statement.
Britain's banking industry is dominated by the Big Four of Lloyds, RBS, Barclays and HSBC, who have all resisted calls for a radical restructuring of their businesses.
Barclays, HSBC and RBS have said that an excessive clampdown on their investment banking activities could disadvantage them with regards to rivals in Wall Street or Asia.
Lloyds, meanwhile, has resisted calls for it to split off the HBOS retail bank it bought in a government-brokered merger during the height of the crisis in 2008.
Vickers said forms of separation within such large banks was an option worth considering, such as ring-fencing banks' retail deposits from their investment banking activities and forming separate subsidiaries for these different units.
Under such a subsidiarisation model, banks have to allocate capital to units or country operations, as Spanish bank Santander does with its British arm. The units are legally ring-fenced but remain under the parent's ownership.
If the probability and/or impact of bank failure, particularly of retail service provision, can be reduced by forms of separation between banking activities, then so too might capital requirements, Vickers said.
He added that such a move could be beneficial in the event of a bank's collapse.
Arguably there is a case for some form of ex-ante separation so that bank operations whose continuous provision is truly critical to the functioning of the economy can clearly be easily and rapidly carved out in the event of calamity.
The ICB will produce an interim report on its findings in April, before its final conclusion in September.
One British politician, who serves on the Treasury Select Committee dealing with banks, said the subsidiarisation model was actively being considered within the industry.
The Commission is not leaning in any particular way but the discussion on separate subsidiaries is all to play for, said Labour member of parliament Chuka Umunna.
(Editing by Toby Chopra)