BANK of England Governor Sir Mervyn King has predicted that bank bosses could eventually decide to split up their institutions, even though planned reforms stop short of this.
But he also warned that the new set-up could be undermined unless regulators are protected from bank lobbying.
The Government plans to force banks to ring-fence their retail banking businesses from higher-risk investment banking arms.
Sir Mervyn supports complete separation of the two forms of banking and predicted that falling investment banking profits could prompt institutions to pursue a split.
"The economics of investment banking have changed radically. It may well be that the nature of banking looks very different and separation may emerge as the natural outcome," he said.
He added that the changing dynamics might prompt bank bosses to reform their organisations' cultures, which he believes have been affected by the aggressive ethos of investment banking.
Sir Mervyn, however, also called for the new banking rules and powers to be clearly defined to protect regulators from lobbying and the ring-fence being undermined.
He suggested banks would be able to get around the new rules if the interpretation of the separation depended on negotiations between the banks and the regulators.
Sir Mervyn's comments echo warnings about the lobbying power of banks from other senior regulators, Financial Services Authority chairman Lord Adair Turner and the FSA's banking division head Andrew Bailey earlier this week.
The views of Sir Mervyn, who retires next year, are not wholly shared by Paul Tucker, the deputy Bank Governor seen as the frontrunner to succeed him. Mr Tucker said he does not back splitting banks completely and said the system could still be "blown up" by the collapse of financial institutions that are not banks.
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article