To split or not to split? What is the future for Britain's banks?

It may be called the Independent Commission on Banking but its boss and his four henchmen spent most of their first public outing on Friday defending their autonomy as they investigate whether the banking industry needs to be shaken-up, or even broken-up.

Although known as a consumer champion, Clare Spottiswoode, explained she was there to represent the UK, not just customers while Martin Taylor, a former Barclays boss, said he's not relying on what he learnt 15 years ago. Financial Times columnist, Martin Wolf, said that although he has left a 'paper-trail' he's yet to make up his mind and Sir John Vickers, the commission chairman, added he will take a pragmatic approach. Even the tanned Bill Winters, a former Wal Street top dog who ran JP Morgan and is seen as the token investment banker, declared he 'was no one's man."

This is just as well, as the commission has one of the most complex issues to unravel; whether Britain's banks should be split between their retail and investment banking functions and whether there is enough competition in the industry. Over the next few months, the commission will be calling on banks, and other interested parties for evidence, as well as holding debates open to anyone who wants to hear or give a view.

Behind the commission is the Business Secretary, Vince Cable (pictured, top), who said again last week that breaking–up the banks is his objective. Denouncing City bankers as "spivs and gamblers", he warned: "We just can't risk having banks that are too big to fail."

The commission has a year to consider the structure of the British banking system, and its chairman, Sir John, will be lobbied hard on whether investment banks can continue to sit inside the same groups as retail banks. If he decides not, banks such as Barclays and HSBC will have to decide whether to split or move abroad.

Sir John has form with the banks. When he headed the Office of Fair Trading, he blocked Lloyds' proposed merger with Abbey National and produced tough reports on small-business banking, credit cards and switching current accounts. Most of his four-strong team have backed splitting banks.

Wolf, the Financial Times's chief economic commentator, concedes that separation would pose practical problems, but this year wrote: "Volcker's axe is not enough to cut banks to size." Spottiswoode, a former gas regulator, sat beside Cable on the Future of Banking Commission chaired by Tory MP David Davis. In June, this commission concluded: "Breaking up the banks would be a major recasting of the global financial system but it would eliminate conflicts of interest and contribute to a safer system by reducing the scale of individual banks."

Taylor, a former Barclays chairman, told the Davis inquiry that universal banks – those combining investment and retail banking – must be regulated carefully and hard. "After I left Barclays, I said the investment banking activities of a universal bank were at all times parasitic on the retail bank balance sheet. I used the word carefully and I would not change it now."

Winters, the fourth member of the team, is the former co-head of investment banking at Wall Street's JP Morgan and may be alone in defending the status quo.

The call to split has many champions, not least Mervyn King, the Bank of England's Governor, who under the government's reform of bank supervision will become their new regulator. He opposes banks that are "too important to fail" and wants state guarantees restricted to "utility banks".

In America, a former Federal Reserve chairman, Paul Volcker (pictured, centre), now chairing President Barack Obama's Economic Recovery Advisory Board, proposed banning banks that take public deposits from also conducting proprietary trading, hedge fund, or other risky activities.

America's Glass-Steagall Act from 1933 to 1999 prevented US banks from combining retail and wholesale operations and many blame its repeal for the financial free-for-all that resulted in the crash.

But Alistair Darling, the former chancellor, says a UK version of Glass-Steagall is not the easy solution its supporters claim. Northern Rock, he points out, had no investment banking business, and Lehman Brothers had no retail activities.

British business is not as keen as Cable on breaking up banks either, arguing that companies use both utility and investment banking services and want joined-up finance. Richard Lambert (pictured, bottom), the director-general of the CBI, says the Vickers commission leaves a cloud of uncertainty and while that remains, "banks will be cautious about supporting the credit expansion the economy is going to require."

Sir John – a former Bank of England chief economist who sat on the monetary policy committee with King – has already started meeting bank chief executives. Since the commission was announced in June, it has met twice at the Royal Society in London where it decided to hold public debates between now and Christmas so that bank customers can air their views.

The commission has now moved into the Competition Commission's Holborn headquarters with a dozen staff recruited from the Office of Fair Trading, the Bank of England, the FSA, the Treasury and Cable's Department of Business. Banks, whether high-street lenders or foreign-owned institutions, will be invited to make written submissions before being individually interviewed.

Friday's document spelt out the commission's remit and options. By next spring, Sir John plans to produce a paper outlining the commission's thinking, either setting out its proposed action or offering a range of options. His final conclusions are due in September.

Yet whatever those conclusions, Cable's hopes of splitting the banks may be blocked by the Chancellor. Sir John's report will go to the Cabinet Committee on Banking, which is chaired by George Osborne. Cable is only deputy chairman and Osborne has been wary of Britain taking action independently of other countries.

The universal banks have warned the Chancellor – as they will tell Sir John – that unilateral constraints could force them to relocate abroad. Moves offshore have been considered by HSBC – whose chief executive has already decamped to Hong Kong – Barclays and Standard Chartered, whose operations are almost exclusively overseas.

While Treasury ministers fear the loss of financial service companies, Cable can now expect opposition to a split from within his own department. His new Trade minister is Stephen Green, the outgoing chairman of HSBC, who is committed to universal banking. And with Green's chairmanship of the British Bankers' Association being handed to Marcus Agius – the Barclays' chairman who offended Cable this month by appointing a "casino banker", Bob Diamond, to run that bank – tough opposition can be expected from the sector's trade body too.

Agius will remind Cable that neither Barclays nor HSBC received direct government help in the post-crash bailout. He could also remind ministers that anything Sir John does to damage the sector might adversely affect the value of the state's investment in Lloyds, Royal Bank of Scotland and Northern Rock.

Dividing banks is feasible if difficult. High street operations could be demerged or sold, but, without the retail business's reserves, the investment banks would need higher capital ratios.

Sir John admits separation would be complex, but he may decide it is possible without finding new owners. Although Cable demanded the commission implement his wish to split the banks, Sir John 's letter of appointment from the Treasury stresses "the importance of generating practical recommendations".

HSBC will tell Sir John – and Green will no doubt tell Cable – how that bank has long operated in discrete units. Each sector in which it trades raises money locally, manages its own balance sheet with its own capital and decides its own lending. In theory, if one country got into trouble, it could be abandoned without damaging others. It is a model other bank could follow.

David Davis says: "The most radical and purest structure would require universal banks such as Barclays and integrated investment banks such as Goldman Sachs to spin off the trading part of their investment activities. Without the ability to cross-subsidise, the power of the big firms would be reduced and new entrants would find it easier to break in, thus widening customer choice and breaking the oligopoly."

Fate of Britain's banks in five people's hands

Independent Commission

Sir John Vickers, Clare Spottiswoode, Martin Taylor, Bill Winters, and Martin Wolf will soon hog the headlines. But who are they?

Vickers

Respected across the sector for his work on the Bank of England's monetary policy committee, Oxford graduate Sir John Vickers is an expert on competition and economic regulation. The Chancellor, George Osborne, says that Sir John "has the experience, integrity and independence required to lead this debate".

Spottiswoode

Former gas regulator Spottiswoode's CV starts with the civil service in the late 1970s and continues with roles at big companies such as Tullow Oil. She has openly criticised politicians for being too interventionist in the banking crisis.

Taylor

The former Barclays chief executive felt wronged by his departure from the high street bank in 1998. It was widely believed that Taylor's sudden departure was the result of a rift with then-chairman Andrew Buxton. Four years later, Taylor admitted that he and Mr Buxton "disagreed so fundamentally on very important things".

Winters

Tanned and good looking, Winters stood out at the commission's prospectus launch on Friday. Several female journalists hovered around the former investments banker, who insists that despite his background he is not blind to the industry's faults.

Wolf

The assistant editor at The Financial Times, Wolf is one of a handful of economic journalists who have cemented their reputations with their analyses of the broader impact of the credit crunch. He was a senior economist at the World Bank for a decade.