UK bank giants should protect their retail arms from risky investment banking and put more capital aside to prevent future taxpayer bail-outs, according to a key report.
The Government-appointed Independent Commission on Banking (ICB) has called for retail business to be ring-fenced from so-called "casino" banking to protect savers and borrowers in the event of a future crisis.
Lloyds Banking Group should also go further to address competition concerns and sell off more than the 600 branches it has currently agreed with Europe, the ICB said.
Its interim report, which will be followed by final recommendations in September, has proposed a raft of reforms to increase stability and promote competition - including making it easier to switch banks.
But the report stopped short of many of the more drastic measures on the table, such as a full-blown separation of retail and investment banking and a reversal of the HBOS rescue takeover by Lloyds.
The reaction in the market suggested the bank sector had escaped the worst, with shares in Barclays and part-nationalised Royal Bank of Scotland 3% and 2% higher respectively as investors breathed a sigh of relief.
Lloyds shares held firm in a sign the group has emerged relatively unscathed, despite facing a new round of branch and business disposals.
But there were concerns over the eventual cost to consumers of many of the ICB's proposals, while the commission also faced accusations of having let banks off the hook.
Bank analyst Bruce Packard, at Seymour Pierce stockbrokers, said he expects banks to be "secretly pleased" at the proposals.
Trade union Unite voiced fears that the ICB was simply tinkering at the edges, but would create major uncertainty for embattled Lloyds workers as yet more branches look set to go on the sale block.
