Osborne hails plans to reform banks despite fears customers could pay bill

The far-reaching shake-up of the sector includes ring-fencing banks’ high street divisions to protect them from riskier investment arms and setting aside more cash to cushion the blow of potential losses or future financial crises.

However, the Independent Commission on Banking’s (ICB) vision for the industry could take eight years to implement and fuelled fears that the estimated £4bn to £7bn cost of implementing the changes would be passed on to banking customers.

The Chancellor, who has the power to act on or ignore the recommendations, said the report was “impressive” and “incisive” as he pledged to pass legislation required to implement the reforms before the 2015 general election.

Banking shares fell on the FTSE 100 Index though this was largely due to fears over eurozone debt as analysts said the report provided few surprises.

There was some respite for Lloyds after the ICB stopped short of recommending it must lose more branches than the 632 it has been told to sell by EU regulators.

But the report said the Government should ensure the sale leads to the emergence of a “strong challenger bank”.

And economists and business leaders warned that the changes could have an impact on the UK’s growth. CBI Deputy Director-General Neil Bentley said: “The UK is going it alone on ring-fencing, so the Government must rigorously examine how and when to implement these proposals, otherwise it risks damaging businesses and threatening growth.”