The Bank of England must be handed the legal authority to break up banks that misbehave, the Parliamentary Commission into Banking Standards will today tell the Chancellor, George Osborne.

The Commission’s chairman Andrew Tyrie told The Independent that the failure to do this could put Britain at risk of a fresh financial crisis. In a 140-page report, coming just two days after UBS was fined more than £900m for attempting to fix Libor interest rates, the Commission said existing plans to reform banking and impose a ring fence to protect retail depositors fell “well short of what is required”.

Mr Tyrie also said the revelations of what went on at UBS “beggar belief” and provided “the clearest illustration yet that a great deal more needs to be done to restore standards”.

He said the break-up power would protect depositors by “electrifying” the ring fence around their savings. The power would be used in the event that banks try to “game” or get around it. In recommending it, his Commission has set itself on a collision course with Mr Osborne who last month warned members not to attempt to “break up the consensus” on banking reform.

Such a radical proposal could also incite fierce resistance from the banks, which have complained that a wave of new regulations will raise the cost of lending and hold back the economy.

But the Chancellor is now likely to face huge pressure to adopt the report in full, given the high standing of the Commission’s members.

In addition to senior MPs on the Treasury Select Committee, it includes the future Archbishop of Canterbury, Justin Welby, former Chancellor Lord Lawson and the former Cabinet Secretary Lord Turnbull.

The report secured the unanimous agreement of them and all three political parties represented on the Commission. It calls for bank directors to be given a legal duty to protect the integrity of the ring fence, which the report wants to be made subject to an independent annual review. The power to break up banks would only be available after the first review.

A bank at risk of being broken up should first be informed that it is on watch and then a reviewer will be appointed to look at the decision.

But the report also says that it might be necessary to break up all of Britain’s banks. Sir Mervyn King, Governor of the Bank of England, has been a vocal proponent of forcing a break-up. Asked whether a failure to “electrify” the ring fence, as the report suggests, could leave Britain in danger of a second crisis, Mr Tyrie said: “It must do. The ring fence needs buttressing and unless it is buttressed with measures of this type, the risk that it will be tested or circumvented will grow over time with attendant risks to both stability and standards in banks.” Sending a clear message to Mr Osborne, Mr Tyrie continued: “This is a very high-powered committee with long-serving members of the Treasury Select Committee, a former Chancellor and a former Cabinet Secretary and this [verdict] is unanimous.”

The Commission was set up after Barclays became the first bank to be fined for attempting to fix Libor interest rates, which are used to set the price of a huge array of financial contracts including some mortgages. Several more heavy fines are expected with the state-owned Royal Bank of Scotland likely to pay as much as £350m.

Further hearings will be held in the new year to consider whether Britain needs an equivalent of America’s “Volcker” rule, which bans banks from using their own money to place bets, known as “proprietary trading”. The Commission will also look at measures to improve the culture in banking. It is mulling changes in areas such as civil and criminal law, competition and corporate governance.

It is also investigating the collapse of HBOS and will take evidence further evidence on UBS, which it called a “manifest failure of regulation” and standards. The Treasury said it would “consider” the report.

Electric ring fencing: How it would work

* A ring fence of retail and small-business banking to be subject to independent annual review but no Government guarantee.

* Bank of England to hold reserve powers to break up banks that try to break ring fence. Could lead to all banks facing break-up.

* BoE’s Financial Policy Committee should oversee bank “leverage” or level of borrowing.

* Legal requirement on directors of banks to uphold ring fence.

* BoE’s Prudential Regulation Authority needs stronger mandate.