"Radical" banking overhaul urged

The Treasury Select Committee urged ministers not to rule out the break-up of too-big-to-fail banks in future reforms of the sector.

But MPs also warned that planned moves such as living wills to wind-up banks in an orderly fashion were likely to raise the cost of credit for customers.

The Government is against splitting up major players, arguing that both "narrow" safer banks and riskier investment banks were hit by the financial crisis.

However, the MPs said the debate should "remain as wide as possible" and highlighted US reforms which would potentially limit the size and scope of bank activities.

The committee also questioned the ability of big banks to spread risk and called for research on whether a larger number of specialist banks could be better for the economy.

Chairman John McFall said "radical action" on reform was needed.

He said: "During the financial crisis, governments have effectively stood behind the banking system.

"If international banking in the UK is to remain credible, reform must ensure that the taxpayer is better protected from picking up the bill."

The committee also acknowledged that the introduction of living wills would transfer some of the risk from taxpayers to the financial sector.

"This may raise the cost of credit, but it will do so because risk is priced more accurately," the report said.

Mr McFall added that the reckless lending of the boom years should not be replaced with "equally irrational restrictions" on banks, but said policymakers needed to strike a balance between changing the system and protecting consumers.

He said: "The more consumers are protected, the more risks taxpayers may have to bear; the more banks have to pay for their capital, the higher the rates they will charge their customers.

"Policymakers will have to decide where the trade-offs should properly be made and how this should be explained to the public."