A five-person panel will this week set out its remit for a year-long probe into whether Britain's banks are too powerful and need to be reined in, set to shape the landscape for big lenders.
At a time of dramatic change at the helm of the banks, there is a threat that new chief executives at Barclays and Lloyds and a new chairman at HSBC may take control of different banks to the ones they agreed to head.
Britain's Independent Commission on Banking (ICB) was appointed three months ago by the government to assess the structure of the industry, with a view to reducing systemic risk, mitigating moral hazard and promoting competition. It has until the end of 2011 to report, and will refine its scope on Friday.
It is unlikely banks will be forced to break up, bankers and analysts said. Most universal banks proved stronger than many narrow lenders during the crisis, and a full break-up could also prompt top firms to shift overseas.
"The risk of separation is close to nil," said Ian Gordon, analyst at Exane BNP Paribas. "It's not practical to achieve and I think it's nigh on impossible to achieve a physical separation of retail and investment banking arms, or it would take such a protracted period to unwind it's not a feasible option."
Analysts said the Commission is more likely to consider measures, such as requiring firewalls or independent capital and funding for separate units.
The ICB's paper is not expected to indicate the thinking of the five commissioners, but could show it has narrowed its focus, potentially on whether there is a lack of competition in retail banking. That would put part-nationalised Lloyds most in the line of fire. Britain allowed Lloyds to rescue stricken lender HBOS as the financial crisis raged, but that has given it a dominant position in retail banking.
Angela Knight, head of the British Bankers' Association lobby group, recently said assessing High Street competition would be a more logical area to explore than splitting lenders.
"For the UK to be going alone with a banking commission, which is constantly talked about from the perspective of breaking up big banks, is making us look an unattractive proposition," Ms Knight said. "The UK is standing out now and looking quite strange internationally."
Meanwhile, Britain's deputy prime minister, Nick Clegg, today said banks should show restraint when setting bonuses this year, hinting they could be hit by higher taxes if they do not.
HSBC, Barclays and Standard Chartered have all warned they could leave Britain if the regulatory environment gets more difficult.
Banks are preparing for change and making contingency plans, which could ring-fence parts of the bank or set up separate legal entities, industry sources said.
The commission - chaired by John Vickers, former chief economist and member of the Bank of England's monetary policy committee - will make its proposals to the government to choose whether to implement.
Reuters