Chancellor threatens to break up banks if they fail to ring-fence savers’ deposits

George Osborne vowed yesterday that 2013 will be the year when the banking system is “reset”, with new powers to break up the banks if they do not follow rules to ring-fence risky operations from savers’ deposits.

Outlining the Government’s Banking Reform Bill, which went to Parliament yesterday, the Chancellor told bankers in Bournemouth that there would be no more “too big to fail” banks and unveiled payment reforms to speed up the banking system.

His comments look set to incur the wrath of the City after he pledged to introduce powers to “electrify the ring-fence” if lenders fail to split high street branch operations from the dealing floor.

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The Bill has reignited fears that Britain’s biggest banks could move abroad, with the British Bankers’ Association (BBA) warning the plans will damage London’s “attractiveness as a global financial centre”.

The Chancellor also signalled that the forthcoming fine for Royal Bank of Scotland (RBS) as part of the Libor-rigging scandal will be paid out of the bonuses of investment banking staff. He said: “Any UK fine will benefit the public. And when it comes to RBS, I am clear that the bill for any US fine related to this investigation should on this occasion be paid for by the bankers, and not the taxpayer.”

Outlining the Banking Reform Bill in a speech at JP Morgan in Bournemouth, Mr Osborne said: “2013 is the year when we re-set our banking system. So the banks work for their customers – and not the other way round.

“So that those who guard over the banks to keep our economy safe are the right people with the right weapons to do the job.

“And so that when mistakes are made, it’s the banks and not the taxpayer that picks up the bill.”

Mr Osborne also confirmed plans to set up a new watchdog and hand back responsibility to the Bank of England to keep the banking system safe, the “super cop” of the financial system.