Osborne backs break-up of banks that fail to reform
His speech comes on the same day the government introduces its Banking Reform Bill in Parliament.
Customers will also be able to switch bank accounts to a rival within a week.
Mr Osborne also said the banking system was not working for its customers, particularly small businesses and individuals.
He pointed to the fact that large banking transactions could be done instantly, whereas small businesses could wait days for money to pass through the system.
Mr Osborne had previously warned against "unpicking the consensus" over structural reform of the sector.
But the chancellor appears now to have accepted a major recommendation of last year's Parliamentary Commission on Banking Standards which called for a reserve power to "electrify the ring-fence" if banks did not implement reforms.
What the Banking Reform Bill does
- The Ring-Fence: The High Street activities of each UK bank are to be put into a separate subsidiary from its riskier investment banking.
- Electrification: Regulators will be given the power to split up an individual bank altogether, subject to certain conditions, if the regulator deems that bank to be undermining the purpose of the ring-fence. Regulators will also review the entire UK banking industry each year to determine whether the ring-fence is proving effective.
- Deposit Guarantees: The Financial Services Compensation Scheme currently guarantees up to £85,000 of every deposit in a UK bank. Under the bill, if a bank goes bust, the FSCS will be paid out ahead of other people owed money by the bank. It means that the FSCS will be better able to recover the money it has guaranteed, which should reduce the potential bill for taxpayers if there is a shortfall.
- Loss Absorbency: The bill gives the Treasury the power to impose tougher requirements on banks to increase their ability to absorb losses, in particular by requiring a bank to borrow money from markets in a form that allows the bank to impose losses on the lenders if it gets into trouble.