Lloyds and RBS fall as government favours ring-fencing banks

Lloyds’ Frankfurt-listed shares were down 2.9 per cent, while RBS fell one per cent. HSBC edged up by 0.2 per cent in Frankfurt while Barclays was unchanged.

Treasury sources said Osborne would use a speech today to throw his weight behind recommendations that banks’ retail arms should be ring-fenced from their investment banking operations.

In April, the Independent Commission on Banking (ICB) set up last year to examine reforming a sector that was badly burnt by the credit crisis - first laid out its ring-fencing idea.

The ICB stopped short of recommending a full break-up of banking groups. Instead it proposed distancing retail banking from investment banking by setting up different subsidiaries for different business units under one parent holding company.

The commission also suggested that the top retail banks should hold a minimum core Tier one capital ratio of 10 per cent - some three percentage points higher than the seven per cent recommended by the Basel committee of global banking supervisors.

The ICB also proposed that Lloyds might have to sell hundreds more branches on top of an order by European regulators for it to divest some 600 branches following its bailout by the government during the credit crisis.