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Inquiry Boss Says Banks Could Be Broken Up

(c) Sky News 2012

The head of a banking inquiry has said he "would not resist" a break up of banks if splitting retail arms from risky investment divisions failed to protect taxpayers.

Sir John Vickers, who chaired the Independent Commission on Banking (ICB), said it may be necessary if so-called ring-fencing fails to achieve its desired effect.

Sir John and his colleagues on the ICB last year recommended that UK banks ring-fence their high-street or retail arms from the high-risk investment sections.

On Monday, members of the Parliamentary Commission on Banking Standards pressed Sir John, an outside runner for the role of Bank of England governor, over the prospect of fully separating bank divisions.

The former chief economist at the BoE said: "If the industry turned out to be unreformable, it is possible that total separation would turn out to be the best step to take."

Politicians are currently determining the best way to implement the ICB reforms, which also included improving the way in which banks help customers switch accounts.

Chancellor George Osborne previously said the reforms would be fully implemented by 2019.

Legislation to implement the reforms are expected to be made law before the 2015 election, with a requirement for banks to build ring-fences "as soon as practically possible" after this date.

While banks initially met the reforms with some resistance, many have since become more open to the proposals and some, such as Lloyds Banking Group (LSE: LLOY.L - news) , have started to take steps to ring-fence and protect savers.

In September, the former chairman of the US Federal Reserve Paul Volcker warned that plans to force banks in the UK to ring-fence would not work in the event of a bailout.

Mr Volcker - the architect of the "Volcker rule" - said the plans would only work in "fair-weather" conditions but not when banks were under pressure.

In the US, the "Volcker Rule" advocates an outright ban on all forms of speculative investment activity that may damage bank customers.