Britain's banks could face the threat of being broken up after a report warned the ring-fence to separate risky operations from savers' deposits needed "electrification".
The Parliamentary Commission on Banking Standards - whose membership includes the future Archbishop of Canterbury Justin Welby, former chancellor Lord Lawson and Treasury committee chair Andrew Tyrie - said plans included in the Banking Reform Bill "fall well short of what is required".
In its first report since being set up in the wake of the Libor-rigging scandal, the Commission said legislation should include a reserve power for full separation if banks did not implement reforms.
The Commission will also take evidence in the new year on whether separation of proprietary trading would be more appropriate. Its initial recommendations could put it on a collision course with Chancellor George Osborne, who warned the Commission last month against "unpicking the consensus" over reform proposals in the Bill.
The report comes a day after Swiss banking giant UBS agreed a £940 million settlement for "widespread and extensive" attempts to fix Libor rates after admitting fraud and bribery.
Andrew Tyrie, chairman of the Commission, said the latest revelations "beggar belief". "It is the clearest illustration yet that a great deal more needs to be done to restore standards in banking," he added.
While the Commission said it welcomed plans for a ring-fence, designed to make the system more secure and to protect deposits from so-called casino banking operations, it added that loopholes could easily develop. The ring-fence would be "tested and challenged by the banks", while it said politicians could also succumb to lobbying from the industry.
Shadow chancellor Ed Balls said: "This is an important cross-party report which sets out real challenges for the banks, government and Parliament. After repeated scandals, from Libor-fixing to mis-selling to small businesses, it is clear that we need radical reform of our banks."
Mr Tyrie told BBC Radio 4's Today programme that the banks had to be clear there would be "deep trouble" if they attempted to break through the ring fence.
Mr Tyrie said his commission had looked to recommend measures which would improve banks' behaviour long-term. He added: "If you know the fence is electrified, you're less likely to go and poke it to find a hole. We're discussing this in a climate of relative crisis but one day, it's difficult to imagine, in 10 or 20 years' time, there will be a clear blue sky with no clouds on the banks' horizon, and people will get complacent. It's at that point it's crucial you have a set of rules and a system in place that can keep banks away from testing the ring fence."