Market participants in Europe are fearful over the repercussions if recommendations of a new European Union review to split the region’s banks along Glass-Steagall lines were to come into effect.

Central to the new recommendations of the Liikanen Group, which was set up by the European Commission last year to provide independent advice on structural reforms to make banks safer, is the ring-fencing of higher-risk investment banking arms from the more traditional retail deposit-taking business.

“European banking is already undergoing profound change as a result of regulatory reform and of shifts in market fundamentals,” said Simon Lewis, chief executive of the Association for Financial Markets in Europe (AFME), a sell-side industry body.

“It is not at all clear that further structural reform would make the system safer or more efficient. AFME supports the regulatory reform program and the authorities’ aim of restoring confidence in the European financial system. But we do not believe that further changes to the structure of the banking industry are necessary or will contribute to Europe’s economic growth.”

Analysts have said it will likely affect around 20 of the largest banks, with Deutsche Bank, Germany’s largest bank, the bank that may be most affected by the recommendations.

However, some market commentators have welcomed the publication of the report, which was chaired by Erkki Liikanen, governor of Finland’s central bank, on the structure of the European Union banking industry.

“This is an important step towards tackling the distortions of public subsidies and moral hazard in the banking sector,” said Thierry Philipponnat, secretary-general of Finance Watch, a Brussels-based group that aims to serve as a counterweight to the financial industry.

Philipponnat argues that the banks have benefited from subsidized funding thanks to the implicit or explicit state-backing of their retail banking arms. This, he says, has encouraged banks to develop highly leveraged and risky trades while being assured of public support in case of a major loss, which has happened regularly since the onset of the financial crisis in 2008.

“Like all subsidies, moral hazard distorts the market,” said Philipponnat. “It is in the interests of all businesses—large and small—that the EU address this economic distortion through proper structural reform.

“The Liikanen proposals are not just another regulatory initiative; they are the heart of the matter. Problems linked to bank structure, activities and size have been profoundly negative for the EU’s economy. Structural reform is an essential first step to putting that right.”

Other suggestions of the Liikanen review include a reining in of bonuses and separate measures to make banks safer and protect taxpayers from having to bail out failing banks again in the future.

However, the recommendations—which are similar to the U.K.’s Vickers Commission, which last year suggested that banks’ retail operations should be ring-fenced, and the U.S. Volcker Rule which aims to limit proprietary trading—may be watered down if EU member states oppose the findings. A draft law could be written by the European Commission some time next summer.

“This is an important report that will inform our policy on regulating the financial sector,” said Michel Barnier, the EU’s financial services commissioner. “The report underlines the excessive risks taken by banks in the past, and makes important recommendations to make sure that banks work in the interest of their customers. This report will feed our reflections on the need for further action. We need to look at these questions also in light of the financial reforms that I have already put on the table of the European parliament and the Council of Ministers.”

The banks, though, are becoming fearful of this upcoming regulation that will significantly alter current working practices.

“The U.K.’s major banks are already preparing for significant structural changes to their businesses,” said the British Bankers’ Association in a statement. “[The] proposals from the European Commission, along with the U.K.’s Vickers proposals and the U.S. Volcker rule, require changes in the way banks structure their activities

“More details will emerge of these processes in the coming weeks. Customers expect and deserve banks which unfailingly put them first, which are stable and reliable, and which never again have to appeal for taxpayer support. The banks are committed to meeting these expectations, and are working with the national and international authorities to do so.”

The Glass-Steagall Act of 1933 was introduced in the U.S. to control speculation following the Great Depression of 1929 to control speculation. It was repealed in 1999 and some commentators have blamed this as an important cause of the late-2000s financial crisis.