LONDON (Reuters) - Britain's financial watchdog said yesterday banks should start drawing up "living wills" so they can be wound up quickly in times of crisis without destabilising the economy and forcing taxpayers to foot a bailout bill.

The Financial Services Authority (FSA), which issued a raft of proposals to reform the banking industry, said any banks whose living wills were deemed unsatisfactory could face the prospect of separating their retail and trading activities.

"Restructuring could include clear separation between retail deposit taking business and businesses involved in proprietary trading activities, with the latter able to fail even if the former were supported in crisis conditions," the FSA said.

The concept of living wills has been backed by Prime Minister Gordon Brown and Finance Minister Alistair Darling as one measure to help protect the public from propping up buckling banks. But lawyers said bankers might have underestimated the force of regulatory scrutiny.

"Some people might have thought it would just be a cup of tea once a year. It ain't going to be a cup of tea," said Tim Plews, co-head of the London finance and capital markets practice at law firm Clifford Chance.