The idea was raised by the highly respected governor of the Bank of England, Mervyn King, who has launched a blistering attack against the British Government which he says has still done virtually nothing to reform the banking sector.

Mervyn King told an audience of business leaders in Edinburgh that the British people would be paying the cost of the financial crisis for at least a generation.

He called for a wide scale review of how banks operate and said the best outcome would be for them to be split up, so their retail arms could be separated from the riskier investment banking operations.

The speech included his most fierce criticism yet of the industry's failure to reform despite what he called breathtaking levels of taxpayer support.

"In the United Kingdom in the form of direct or guaranteed loans and equity investment it's not far short of a trillion, that's 1,000 billion pounds, close to two thirds of the annual output of the entire economy," said Mervyn King.

"To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many," which drew laughter from his audience. "And, one might add, so far with little real reform."

For all the talk of reform, Mervyn King said the UK Government and the G20 leaders had failed to address the biggest moral hazard in history - the fact that banks now know that they are too big to fail. That when they crumble, governments will be there to pick up the pieces.

But the British Prime Minister, Gordon Brown, who has been travelling the globe as the head of the G20 claiming to be leading the world in addressing the financial crisis, told the House of Commons that he strongly disagreed with Mervyn King's suggestion.

"The difference between having a retail and investment bank is not the cause of the problem," Mr Brown said.

"The cause of the problem is that banks have been insufficiently regulated at a global level and we have got to set the standards for that for the future and we'll be doing that at the G20 finance ministers in a few weeks time."

No concrete reform

That will be at least the fourth meeting of the G20 to tackle banking regulation, but still nothing concrete has come of any of them other than a commitment to increase the amount of capital banks will be forced to keep on their balance sheets.

Mervyn King says regulation cannot stop the kind of speculation that brought the financial system to its knees.

Professor John Kay recently wrote a report on narrow banking, which the governor of the Bank of England quoted in support of his ideas.

"I think what we need to do is be realistic about what regulation can actually achieve, and that means we should basically go for structural solutions," Professor Kay said.

"We should first of all split the utility, the part of the financial system that we all need, to take our deposits and make our payments, from the casino.

"We would create real retailers, and that's a different world from the producer driven culture of the banking network so far. Which is essentially trying to sell us products that very often we don't want and we don't need."

Mervyn King supports a mechanism that allows these retail banks to fail, but without that failure affecting the rest of the economy.

The proposal is for the banks to hold what's known as contingent capital - capital that will turn into shares in the event of a crisis. It has also been called catastrophe insurance.