Richard Griffiths looks at why Banks are nervous about the report

The Cruickshank report, which will be published later on Thursday, is likely to call for major changes in the ways that banks do business on the country's High Streets.

The Treasury has already announced a review of whether mortgage lending should be more tightly regulated under the new Financial Services Act.

Barclays has been looking to merge

The government commissioned the former telecoms regulator, Don Cruickshank, to investigate whether banks are fair to small and medium-sized businesses to whom they lend.

He is believed to have widened the inquiry to include the whole issue of bank charges and cross-subsidies, including passing on interest rate cuts and charges for transferring money.

The banking industry is warning that the recommendations could lead to higher banking charges for personal customers.

But with bank profits likely to soar as the major firms report their results over the next few weeks, there may be little public sympathy for their predicament.

Cross-subsidy

Mr Cruickshank is believed to have discovered that banks subsidise their retail customers through higher business banking charges.

And he is likely to investigate the highly profitable mortgage lending business, putting pressure on lenders to pass lower rates more quickly on to the consumer.

Mr Cruickshank is also likely to focus on banking regulation, particularly how banks try to sell other financial products to their customers.

He is believed to have already talked to the UK's regulatory agency, the Financial Services Authority, about tougher regulation for banks, including an obligation to consider competition issues.

Profits under scrutiny

The UK banking sector is expected to reveal total profits of around �8.5bn this year.

James Johnson, banking analyst at Credit Lyonnais, said UK banks are delivering returns of 25% - 30%, a tidy sum when looking at the cost of capital averaging at 10-11%.

Mr Johnson believes that the Cruickshank report could conclude "that levels of profitability are far higher than is economically justified".

Profits have been boosted by the increase in mortgage lending and house prices, with retail banks like Lloyds TSB and Halifax doing best.

But the wholesale money markets have also recovered from the world financial crisis.

Fear of tighter regulation has sent the shares of many banks tumbling in the past week.

Profits economically justified?

Mr Cruickshank's report could revive pressure in the Labour Party for an excess profits tax on banks, although both Mr Cruickshank and the Chancellor, Gordon Brown, have rejected that approach.

"There's a fair chance he (Mr Cruickshank) is going to conclude that levels of profitability are far higher than is economically justified," said James Johnson of Credit Lyonnais.

However, many banking analysts believe that Mr Cruickshank will stop short of specific measures to curb "excessive" profits.