Vince Cable, the business secretary, has cautioned against reopening the debate about whether to force banks to break up their high street arms from their investment banking, warning it would create "massive uncertainty".
Once one of the strongest proponents of total separation of the banks to avoid the need for another taxpayer bailout, Cable said the independent commission on banking had concluded that ringfencing was the best way to make banks safer.
He was responding to a report by a parliamentary commission on banking standards chaired by the Conservative MP Andrew Tyrie, which put full separation of the banks back on the agenda. The report by Tyrie's commission said the current legislation planned to implement the ringfence fell "well short of what is required". Tyrie said the ringfence should be "electrified" by giving the government a reserve power to separate high street banks from investment banks if they do not implement the proposals.
The independent commission on banking that recommended ringfencing, chaired by Sir John Vickers, was set up soon after the coalition government came to power to thrash out ways to avoid another taxpayer bailout.
Cable said: "On splitting the banks, I started out believing that a complete separation was the only way forward. The Vickers commission, however, argued persuasively and unanimously that ringfencing achieved that objective in a less disruptive way. Andrew Tyrie is right to raise the question of what happens if it fails. But it would create further massive uncertainty to reopen the whole bank reform agenda at this stage."
Bank shares were among the biggest fallers in the FTSE 100 amid concerns, according to Ian Gordon of Investec, that regulators could be given "draconian, arbitrary powers".
The banking reform bill to implement the Vickers report will be formally introduced into parliament next year when it will become clear if the government intends to introduce legislation giving it powers to break up banks if they try to undermine the ringfence.
"The banks have been the subject of an endless series of scandals, most recently with Libor fixing and swap mis-selling to small businesses. It's right that the Tyrie review has made tough recommendations to ensure that there is permanent structural change for the better," Cable said.
Tyrie's commission was set up in the wake of the £290m fine slapped on Barclays for rigging Libor – a scandal which deepened this week when UBS, the Swiss bank, was fined £940m by regulators in the UK, US and Switzerland, also for fixing the key interest rate.
In its report on Vickers, the Tyrie commission criticised the government's decision to water down a so-called leverage ratio which attempts to curb the risks banks can take. The Vickers report set it at 4%, which would restrict leveraging of banks to 25 times, but the government has suggested that the ratio be 3%, allowing a higher leverage of 33 times.
Vickers welcomed the comments on the leverage ratio and the attempts by Tyrie's commission to try to "reinforce" the way the ringfence is implemented. "The parliamentary commission has welcomed ringfencing in the most practical way – by proposals to reinforce it," Vickers said.
"Ringfencing is seen as good for banking standards as well as financial stability. The report is also strong on boosting banks' capacity to absorb losses, particularly the need for government to reconsider its non-acceptance of the ICB recommendation on leverage," Vickers added.
Analysts were concerned about more uncertainty for the banking sector. Gary Greenwood, analyst at Shore Capital, said the report "highlights the ongoing regulatory challenges and uncertainties that still face the UK banks".
"The most controversial proposal in the report, in our view, is that UK banks should be subject to the threat of a full break-up of their retail and investment banking operations if they fail to effectively implement ring-fencing requirements," Greenwood said.