Banking reform 'still does not go far enough'
The government's proposed reforms of the banking sector still do not go far enough, according to a banking commission set up in the wake of the Libor scandal.
Regulators should be able to force a complete split of retail and investment banking across the industry, it said.
The government had rejected that particular option, but has adopted other proposals by the commission.
It comes on the day that MPs debate the Banking Reform Bill in Parliament.
The Parliamentary Commission on Banking Standards, headed by Andrew Tyrie, had recommended the power to "electrify the ring-fence" if banks did not implement reforms.
This means that regulators could split up an individual bank if it appears to be trying to undermine the division between High Street retail banking - where deposits are held - and riskier investment banking.
The government has accepted this, which has been welcomed by Mr Tyrie.
But the bill does not contain the legal powers to separate retail and investment banking across the entire industry, if the need should arise.
The idea was this would be exercisable only after independent review and with the express approval of the Treasury but, according to the commission, the idea has been rejected over fears of giving too much power to regulators.
Mr Tyrie said: "The government rejected a number of important recommendations. We have concluded that the government's arguments are insubstantial.
"There remains much more work to be done to improve the bill."
He added that Chancellor George Osborne had also failed to address the commission's recommendation for periodic, independent reviews of whether the ring-fence is working. Outgoing governor of the Bank of England, Sir Mervyn King, is among those in favour.
Shadow chancellor Ed Balls said: "This latest report from the Parliamentary Commission on Banking Standards makes for disappointing reading. It confirms George Osborne is continuing to duck the radical banking reform we need and which the cross-party commission has demanded."
Chris Skinner, from the Financial Services Club, told the BBC that the bill would damage the banks - and lead to other problems further down the road: "The concern is that our banks become less competitive and will find it more difficult to raise capital because of these rules."
Mr Osborne has said that 2013 is the year when the UK's banks - some of which, such as RBS, are still taxpayer-owned - will be "reset" amid a year of change for UK financial regulation.
Recklessness by banks' so-called "casino operations" was blamed for dragging the financial system to the brink of collapse.
The reputation of banks has been further undermined by scandals such as the mis-selling of payment protection insurance and the rigging of the Libor interest rate.
The Financial Services Authority is being replaced by two bodies. The Prudential Regulation Authority, part of the Bank of England, will regulate financial firms, and the Financial Conduct Authority will oversee consumer protection.
Later this year Mark Carney will become the new governor of the UK central bank, replacing Sir Mervyn King.