The government wants the law to come into effect in January 2014 and banks' activities to be separated by July 2015. It will only apply to institutions with balances sheets over €1.0 billion ($1.3 billion) or with risky positions worth 20 percent of the balance sheet value.
The rules would affect Germany's two biggest banks, Deutsche Bank and Commerzbank, as well as regional banking giant Landesbank Baden-Württemberg
Banking separation is an idea floated by the head of the Finnish central bank and European Central Bank governing council member Erkki Liikanen as a measure for reducing risk in the banking sector.
But one of Deutsche Bank's co-chief executives, Anshu Jain, has repeatedly slammed the idea, saying it would "greatly harm the German economy and German companies."
He argues that if Deutsche Bank can no longer use deposits to refinance its activities in investment banking, the refinancing costs would automatically rise and that would narrow the financing possibilites of major companies.
At the same time, banks with high deposits would find it difficult to find attractive investments for customers, Jain said.