By David Milliken and Matt Scuffham
LONDON (Reuters) - The fate of Britain's two state-controlled banks will become clearer on Wednesday, when finance minister George Osborne is likely to start the clock ticking for the sale of the government's stakes.
But while Osborne will attempt to point to a healthier future for Britain's economy and banking sector in his annual speech to financiers in the evening, reminders of recent troubles will not be far away.
An influential panel of legislators called for new laws on Wednesday to make it easier to jail reckless bankers. Speaking alongside Osborne will be Bank of England Governor Mervyn King, whose disdain for investment banking is clear.
Moreover, although Britain's economic recovery looks to be on a firmer footing than a few months ago, it is still sluggish and vulnerable to a global slowdown, and would benefit from a banking industry better-placed to support business investment.
Britain's previous Labour administration pumped 66 billion pounds ($103 billion) of public money into Royal Bank of Scotland <RBS.L> and Lloyds Banking Group <LLOY.L> in 2008 to save them from collapse at the height of the global financial crisis.
Osborne's Conservative-led government has pledged to return them to the private sector, but has not set a date - something which should change later on Wednesday when he speaks at Mansion House, the Lord Mayor of London's grand official residence.
Osborne said in a radio interview on Tuesday that he would announce "exactly what we intend to do both in the Royal Bank of Scotland and in Lloyds" in the speech.
But he left himself plenty of wiggle room on the precise timing, noting that the exact dates of the stake sales would depend on market conditions.
Selling some of the government's 81 percent stake in RBS and 39 percent in Lloyds before Britain's next national election in May 2015 could help support Conservative claims that it has got Britain's economy on the mend.
Lloyds presents the easier task. Its share price is close to the level at which the public would recoup the money ploughed into the bank.
Industry and political sources have told Reuters that a staged sale to financial institutions is the most likely option, with 10 percent of the bank potentially up for grabs this year.
The future of RBS is less clear following the ousting of Chief Executive Stephen Hester last week, a move which had the backing of Britain's finance ministry.
Although Prime Minister David Cameron said last month he was "open to ideas" over an RBS sell-off, its shares remain well below the government's break-even level, with taxpayers currently sitting on a loss.
Ed Balls, Labour's finance spokesman, said the disposal of RBS risked turning into an electorally driven fire-sale.
The Parliamentary Commission on Banking Standards, set up by the government last year after Barclays <BARC.L> was found to have manipulated global interest rate benchmarks, also said Osborne should immediately consider alternative options for RBS.
Some commission members have advocated hiving off RBS's toxic loans into a 'bad bank' leaving the remaining 'good bank' better able to lend to British businesses and households.
BoE Governor King has also said that it would have been better to have rapidly restructured RBS in 2008 and 2009 and sold it on, as happened to banks in the United States.
On Wednesday night, King will be in valedictory mode, giving his last speech before stepping down at the end of the month, to be succeeded by former Canadian central bank chief Mark Carney.
As such, economists said King was likely to focus on the need for firm bank regulation - where he has backed tougher leverage rules than Osborne favors - rather than to announce a new support scheme for the economy, as happened last year.
Last year's Mansion House speech brought the Funding for Lending Scheme, a joint project of Osborne and King's. It offers banks cheap credit and has made mortgages easier to get but has yet to spur greater business investment.
($1 = 0.6407 British pounds)
(Editing by Hugh Lawson)