Banks' retail operations should be separated from their investment banking arms, the Independent Commission on Banking (ICB) has recommended. The recommendation comes in the ICB's interim report on the sector, with the final report due to be released in September. The ICB stops short of advising that retail and investment banking operations should be divided into completely separate entities.The ICB accuses banks of taking excessive risks in the run-up to the financial crisis, with government guarantees encouraging banks to behave more recklessly. Taxpayers should not be liable for banks' losses in the future and banks should hold more money in reserve to keep them afloat in the event of any future problems, the ICB said."UK retail banking can be protected by its own capital cushion," said ICB chairman Sir John Vickers. "Other parts of the bank should be allowed to fail."The ICB also recommended that Lloyds Banking Group, which arose from the merger of Lloyds TSB and HBOS in the wake of the financial crisis, would have to sell more branches than planned in the interests of competition.It said Lloyds proposed sale of 600 branches would have a limited impact on competition. The decision to amend competition law to facilitate the Lloyds-HBOS merger was a "cause for regret", the ICB said."Enhancing the divestiture would be more economically efficient than reversing the Lloyds TSB/HBOS merger," it said.Lloyds hit back at the proposals, saying" the option for an expansion of the divestiture of 600 branches as mandated by EU ('Project Verde') would not be in the interest of our customers and appears to be based on limited evidence and may significantly delay meeting the commitments agreed between the UK Government and EU."RG