Insulating high street banks from risky ‘casino’ operations will take until 2019

New rules in place by 2019 will create a “ring-fence” around high street banks, so insulating them from the risks run by the “casino” investment operations within the same firms. Banks will also be required to hold equity capital of 10 per cent to act as a cushion against potential losses.

In a statement to MPs detailing the Government’s response to the Vickers Report into the future of banking, Mr Osborne said the changes amounted to “the most far-reaching reforms of British banking in our modern history”.

He told MPs: “Our objective is to make sure what happened in Britain never happens again, that taxpayers are protected and that customers get a better service.

“We want to separate high-street banking from investment banking to protect the British economy, protect taxpayers and make sure that nothing is too big to fail.” He said the changes would cost the industry £3.5bn-£8bn a year, and lead to a reduction in GDP of £800m to £1.8bn.

But he told MPs the costs would be “far outweighed” by the benefit of avoiding future crises, which he said would reach £9.5bn-a-year on “modest” assumptions.

The Chancellor also revealed that the state-owned RBS bank has been ordered to cut its investment activities to concentrate on becoming a “stronger, safer bank”.

And he said changes to be in place by September 2013 will enable individuals and small businesses to switch banks swiftly and easily, as part of a drive to boost competition within the sector.

Sir John Vickers, who chaired the Independent Commission on Banking, welcomed Mr Osborne’s commitments, which he said were in line with the recommendations of his report.

“The costs and dangers of unreformed banks are plain for all to see,” said Sir John.

Shadow Chancellor and Morley MP Ed Balls said: “It is vital the Government now implements these important banking reforms without foot-dragging, back-sliding or watering them down.”