The British government 's inquiry into banking reforms will consider breaking up Britain's largest retail banks to increase competition.
The Independent Commission on Banking (ICB) will look not only at whether to split investment and retail banking operations, but also radical options such as forcing the UK's 'too big to fail' banks to sell off assets to address competition concerns.
It stressed that the commission had not settled on any options at this stage, but chairman Sir John Vickers said 'hard questions' needed to be asked.
The ICB - set up in June to look at financial stability and competition - said the financial crisis and subsequent merger of Lloyds and HBOS had reduced the number of players in the banking sector.
It added that current European Commission requirements for part-nationalised Lloyds and Royal Bank of Scotland (RBS) to offload branches and assets could 'go further'.
One option would be for the British government to use its stakes in the taxpayer-backed banks to improve competition.
'Beyond that, and most radically, is the option of requiring the UK's largest banks to divest assets with a view to creating a more competition market structure,' according to the report.
Another central reform under consideration is the controversial issue of separating investment and retail banking operations.
UK Business Secretary Vince Cable has been vocal in his calls for 'casino' banks to be hived off from retail deposits.
But banking giant HSBC and Standard Chartered have both recently warned such a move could prompt them to move their UK headquarters, sparking fears of a mass exodus.
