MPs are to look at how Britain's banks could be carved up, The Times has learnt. As part of their inquiry into the banking crisis, MPs on the Treasury Select Committee plan to explore the feasibility of introducing legislation along the lines of the Glass-Steagall Act, which prohibited investment banks and retail lenders from operating within the same company. It was designed to prevent potential conflicts of interest.

The Bank of England and the Federal Reserve of America are considering whether banks should be forced to hive off their investment banking businesses, as part of a wide debate among governments and regulators about how to reduce systemic risk among the banks.

While the committee, made up of 14 MPs from the Labour, Conservative and Liberal Democrat parties, was thought to be drawing its inquiry into the banking crisis to a close, it is understood that members now believe that they should spend more time discussing the shape of future financial regulation, and whether lenders should be made to separate their risky investment banking divisions from their retail businesses.

While the committee focus will be on examining the Budget over the next month, it is believed that it will start calling experts, regulators and bankers in the run-up to the summer.

News that the committee plans to examine the break-up issue comes only a day after George Osborne, the Shadow Chancellor, hinted that a Conservative government would break up Britain's nationalised banks and would consider whether to block other lenders from becoming too big.

It is thought that the committee — which has been drafting a report into its findings from the inquiry — will slice its findings into a number of smaller reports, the publication of which will be staggered over the next few months.

The first part is expected to address whether the type and amount of support offered to the banks is appropriate and sufficient. The second is believed to deal with the perceived causes of the banking crisis and to suggest measures for changing executive pay. The third part of the report is expected to address the issue of regulation, the role of the Financial Services Authority, and whether banks need to shield their retail businesses from their investment banking arms.

Although politicians on both sides of the Atlantic have been pressing for banks to be forced into finding a means of ringfencing or splitting off their riskier investment banking businesses, in Britain the Prime Minister and the Chancellor want to beef up the regulation of banks rather than force the lenders into breaking up their businesses.

Any move to compel the banks to separate their investment banking divisions could trigger a shockwave across the City and Wall Street.

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