Britain needs to introduce legislation that could break up banks if standards slipped because current reform proposals fall short of what is needed, an influential panel of lawmakers said.
The Parliamentary Commission on Banking Standards also said the government could set tougher rules for how much leverage banks were allowed, adding the committee itself would consider next year whether to propose banning proprietary trading.
The PCBS said on Friday banks should be allowed to sell simple derivatives within their ring-fenced operation, which had been a point of contention.
Britain, going further than most countries in pushing through change, is forcing banks to separate, or "ring-fence", their domestic retail arms from riskier investment banking.
"The proposals, as they stand, fall well short of what is required. Overtime, the ring-fence will be tested and challenged by the banks," PCBS chairman Andrew Tyrie said.
"That is why we recommend electrification. The legislation needs to set out a reserve power for separation; the regulator needs to know he can use it."
Britain wants to prevent a repeat of the need for taxpayers to bail out lenders, as happened in 2008 with a 65 billion pound ($106 billion) double rescue of Lloyds Banking Group and Royal Bank of Scotland.
The PCBS, asked to assess government plans before their introduction next year, said banks had to be discouraged from gaming the new rules for the ring-fence to succeed.
"All history tells us they will do this unless incentivized not to," Tyrie said, adding politicians could be lobbied to put holes in the ring-fence.
"Additional powers are essential to provide adequate incentives for the banks to comply not just with the rules of the ring-fence, but also with their spirit," the Commission said in its 146-page report.
A Treasury spokesman said it would study the report and respond when reforms were brought to Parliament early next year.
"More Needs to Be Done"
The PCBS was set up after Barclays was fined for rigging global interest rates and banks were slammed for a series of mis-selling scandal.
Tyrie said the market rigging and corruption shown this week at Swiss bank UBS "beggar belief. It is the clearest illustration yet that a great deal more needs to be done to restore standards in banking."
Among plans to rein in risk-taking is a cap on leverage, which Britain plans to set at 33 times banks' capital - weaker than an original proposal for a maximum of 25 times.
The PCBS said it was "not persuaded by the government's relaxation" of that leverage rule, adding the future regulator, the Financial Policy Committee,should set the leverage cap.
Tyrie said it may also be appropriate for Britain to block banks from any proprietary trading - known as the Volcker Rule in the United States - and the PCBS will take evidence on that early next year.
The cross-party commission, which includes Justin Welby, the next Archbishop of Canterbury - the Church of England's most senior bishop, has spent the past three months deliberating the reform plans, taking evidence from the bosses of major banks as well as regulators, politicians and central bankers.
It said it was concerned too many reforms will be left to the discretion of the future regulator, and said the power to force bondholders to take losses when a bank hits trouble should be included in primary legislation.