U.K. bank chiefs Wednesday said ringfencing retail banks from investment banking activities could make banks riskier and hurt the economy,

U.K. bank chiefs Wednesday said ringfencing retail banks from investment banking activities could make banks riskier and hurt the economy, and even add to perceptions that the government would step in to help failing institutions.

In testimonies to U.K. lawmakers who are studying early proposals on banking reform from the government-appointed Independent Commission on Banking, Royal Bank of Scotland Group PLC (RBS) Chief Executive Stephen Hester said separating retail banking "increases some of the systemic risks and decreases the ability of banks to withstand the risks," and that stripping out these activities "would doubly support" existing perceptions among retail and small business customers that the government would bail out banks in times of crisis.

HSBC Holdings PLC (HBC) Chairman Douglas Flint said ringfencing might be necessary from a policy point of view, but that its effect on the real flow of credit to the economy should be the main driver in determining any implementation.

After a debilitating financial crisis that nearly brought down RBS and Lloyds Banking Group PLC (LYG), requiring hefty government bail-outs, the U.K. is looking for ways to make its banking system safer and more competitive. Last year, it created the ICB to come up with measures to achieve those aims. It outlined initial options in April, including higher capital requirements for U.K. retail banks and the ringfencing of many retail activities from riskier investment-banking operations.

Banks have accepted that some form of ringfencing is likely, but are lobbying to have a say on how lines are drawn. HSBC's Flint Wednesday said the bank submitted proposals to the Treasury committee and the ICB on how it thinks a ringfence should work.

The ICB will recommend a final package of measures in September, which the government will then decide whether to adopt or reject, in part or in whole.

Lloyds Banking Group CEO Antonio Horta-Osorio and Barclays PLC (BCS) CEO Bob Diamond are due to testify to the Treasury committee at 1500 GMT.