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Banks are to be forced to ring-fence their retail operations from investment banking, under plans to be announced by the chancellor this evening.
George Osborne will endorse recommendations from the Independent Commission on Banking (ICB) and say banks must be set up so that their branches and public savings and loans would not be damaged if their trading arms ran into trouble.
The ICB made preliminary suggestions in April and is due to publish its final report on September 12, setting out details on how banks' firewalls will work.
A Treasury spokesperson said: "This is a far reaching shake up to make high street banks safer and protect taxpayers.
"The government set up the banking commission to ask the difficult questions that weren't asked before the crisis and this is right at the heart of their answer."
The chancellor will make his annual Mansion House address to the City of London's financial elite this evening, a gathering that will also be addressed by Bank of England Governor Mervyn King.
Osborne is also expected to announce the privatisation of Northern Rock, which was nationalised in February 2008.
He will say that banks will have to hold more capital to protect themselves against future losses than the new international minimum of 7 per cent.
Dods Parliamentary Communications Ltd
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