The Independent Commission on Banking (ICB), set up by the government last year to examine making banks safer and more competitive after the sector got badly burnt in the credit crisis, presents its interim report on Monday.
Analysts polled by Reuters expect it to recommend that UK banks form separate subsidiaries for their retail and investment banking arms, thereby "ring-fencing" and protecting savers if the investment bank fails.
The Financial Times reported on Saturday that British Finance Minister George Osborne welcomed this subsidiarisation approach, but lawyers said this could be difficult to carry out in practice and could disadvantage UK banks to overseas rivals.
"A bank is a bunch of systems with a legal structure on top. It isn't practicable to say that one part or another is a subsidiary. It's like telling someone to divide their body in half," said Clifford Chance lawyer Simon Gleeson.
The credit crisis battered Britain's banking industry, which is one of the main contributors to the UK economy. Britain had to bail out and part-nationalise Royal Bank of Scotland and Lloyds and fully nationalise Northern Rock.
In light of this, the banking commission, headed up by Oxford University academic Sir John Vickers, is probing how to make the system safer and more competitive.
The "ring-fencing" model is aimed at protecting ordinary savers if a company's investment bank fails, and to ensure that a bank's "utility" functions -- such as money transfers or lending to businesses -- still operate under such a scenario.
While this proposal would not be as drastic as recommending that groups split their retail and investment banks into two entirely separate companies, analysts say it could put onerous new capital requirements on the top UK lenders.
Other jurisdictions -- continental Europe, Asia and North America -- have not been examining similar reforms on this scale and Linklaters lawyer Benedict James said British banks could find themselves at a competitive disadvantage.
European regulators want banks to raise more capital -- which Vickers is expected to support -- but have not suggested ring-fencing retail and trading arms.
Similarly, American regulators have not pushed as hard on forming barriers between risky market trading and retail deposit-taking.
"The UK banks might find themselves on an uneven playing field with the US as regards capital levels, and with Europe as regards subsidiarisation," said Linklaters' James.
Britain's "Big Four" banks - Lloyds, Barclays, HSBC and Royal Bank of Scotland - have all resisted calls for a radical shake-up of their business.
The ICB's findings could also affect Spanish bank Santander, which now owns the former UK bank brand Abbey, and Standard Chartered, which is headquartered in London despite making most of its money in Asia.
There is a perceived risk that the likes of Barclays and HSBC could move their headquarters away from London if British banking regulation becomes too much of a burden.
Management consultancy Oliver Wyman last month put the cost of Vickers' proposed reforms at up to 15 billion pounds ($24.6 billion) a year, while analysts polled by Reuters said Barclays was most at risk from the possible changes to the industry.