Britain's banks will be broken up if they fail to ring-fence retail operations from their investment divisions to avoid any future state bailouts of lenders, finance minister George Osborne warned on Monday.
As the government formally published legislation aimed at radically altering the landscape of Britain's financial sector, Chancellor of the Exchequer Osborne used a speech to say that "2013 is the year when we re-set our banking system."
Addressing staff at US investment banking giant JP Morgan in Bournemouth, southern England, he said: "My message to the banks is clear: if a bank flouts the rules, the regulator and the Treasury will have the power to break it up altogether -- full separation, not just a ring fence."
Osborne said: "In the jargon, we will "electrify the ring fence," adding that the Bank of England would be "the super cop" of Britain's financial system going forward.
The chancellor outlined four key changes -- "a brand new watchdog with new powers to keep our banks safe so they don't bring down the economy"; "a new law to separate the branch on the high street from the dealing floor... to protect taxpayers when mistakes are made;" "changing the whole culture and ethics" of banking and giving "customers the most powerful weapon of all: choice."
The government had already announced plans to force banks to ring-fence operations by 2019, in a bid to avoid taxpayers having to bail out troubled banks such as RBS and Lloyds -- as was the case during the financial crisis.
But the draft law has been toughened after Britain's Parliamentary Commission on Banking Standards recently complained that the proposals fell "well short of what is required."
Osborne had previously warned the commission against "unpicking the consensus" on structural reform of the banking sector but appears to have accepted its warning that the draft law left room for loopholes.
"Today, we are publishing the legislation that will turn... this consensus for change into law," he said on Monday.
"A law for the first time ever, to separate the retail and investment arms of banks, and erect a ring fence around the retail bank so its essential operations continue even if the whole bank fails."
Osborne said he expected the legislation to be passed by parliament by a year's time.
The announcement puts the finance minister on a collision course with Britain's banks, which claim the legislation would make London less attractive as a global financial centre.
"This will create uncertainty for investors, making it more difficult for banks to raise capital, which will ultimately mean that banks will have less money to lend to businesses," said Anthony Browne, chief executive of the British Bankers' Association.
"Above all, what banks and business need is regulatory certainty so that banks can get on with what they want to do, which is help the economy grow," he added.