The government's plans to split banks' retail and investment branches "fall well short", MPs have warned.
A report from the parliamentary commission on banking standards, set up after the full scale of the inter-bank lending rate scandal emerged earlier this year, has warned the government's reforms do not do enough to protect consumers in their current state.
Ministers have proposed creating a ring-fence to separate banks' retail operations, in which customers' savings and current accounts are based, from banks' riskier investment banking activities.
The measures being considered in the draft financial services (banking reform) bill do not go far enough, MPs and peers on the commission concluded.
"Over time, the ring-fence will be tested and challenged by the banks," committee chair Andrew Tyrie, who is also chair of the Commons' Treasury committee, said.
"Politicians, too, could succumb to lobbying from banks and others, adding to pressure to put holes in the ring-fence.
"For the ring-fence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to."
The commission recommends "electrification" of the ring-fence as a result. It calls for the banking watchdog to be given the power to separate banks if it decides it is necessary to do so.
Its calls for toughened reforms have met with a storm of opposition from the City, which fears it could lose its pre-eminent position as a global trading centre.
"While it is clearly important to retain a degree of flexibility around the scope of the ring fence it is equally critical that any new system creates regulatory certainty for banks and their investors," British Bankers' Association chief executive Anthony Browne said.
"Too much uncertainty will deter investment and could hurt London's position as the world's leading financial centre. We will work with parliamentarians to try and achieve the right balance."
Matthew Fell, the CBI's director for competitive markets, added: "It is important that banks implement the ring-fence fully.
"Whilst the threat of full separation might help to concentrate minds, such a move would be detrimental to businesses, preventing them from accessing the full range of services they need from a single provider."
Labour has rushed to pressure the government to accept the commission's findings. Its leader Ed Miliband and shadow chancellor Ed Balls had spent the conference season warning that full separation will be necessary if banks do not voluntarily meet the letter and spirit of the proposals originally put forward by John Vickers.
"The commission is clearly right to say the jury is still out and to demand a reserve power for full separation of the banks," Balls commented.
"We need serious cultural change in our banks and the commission's next report on the culture and practices of the banks will be just as important as these vital structural changes.
"Only then will we get the banking system our businesses and economy needs."
The commission's first report covered just one aspect of the reforms faced by the banking sector. Next year it will look at other issues including competition, corporate governance, regulation, and civil and criminal law.