Business Secretary Vince Cable has insisted that his call for the full separation of high street banks from their more risky "casino" operations remains on the table, despite Chancellor George Osborne's public endorsement of a less radical alternative.
Mr Cable used a speech in London to set out a series of tests which must be met before he will give his backing to proposals for a "ring-fence" to isolate retail and investment activities within the same institution.
He insisted that the Government would not come to a "firm conclusion" on the issue until after the final report of Sir John Vickers' Independent Commission on Banking in September.
But he accepted that if his tests are met and the Vickers Commission shows that ring-fencing can be as effective as full separation at lower cost, "then that, I am sure, is the direction we will go in".
Mr Cable made clear that there was no question of retaining the status quo, which was blamed for aggravating instability at the time of the financial crisis of 2008. And he said that the Government will act quickly to implement change as soon as possible after the publication of the final Vickers Commission report.
Mr Cable has been a long-standing advocate of splitting up the banks to avoid a repeat of the taxpayer-funded bailouts of institutions which were deemed "too big to fail". But his hopes of achieving this goal received a knock in June when Mr Osborne publicly endorsed the ring-fencing proposals in the Commission's interim report.
Mr Cable suggested that Mr Osborne's comments did not represent the Government's final judgment on the issue: "The Government will be seeking reassurance from the final report in demonstrating that a ring-fence can be as effective as full separation at lower cost.
"The key tests will be: would it stop banks using deposits underwritten by the taxpayer to cross-subsidise their other activities, the so-called 'casinos'?; will the ring-fence be high enough and Chinese walls strong enough to eliminate regulatory arbitrage by banks?; will the division between what is inside and outside the ring-fence ensure that nothing resembling a universal bank remains?
Britain was in a "dangerous" position when banks headquartered in the UK had balance sheets of £7 trillion - four times UK GDP - but could not be allowed to fail if their investment gambles go wrong because of the knock-on effect on ordinary customers' savings, said Mr Cable.
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The Bank of England later announced that the major banks' lending in the second quarter of 2011 under the Project Merlin arrangements will be published on August 12.
