The British chancellor has proposed a ring fence separating high-street retails banking from investment banking branches within institutions will need to be ‘electrified' with severe sanctions. Osborne will publish the Banking Reform Bill giving regulators the power to split banks up if they do not comply fully with new rules designed to protect British taxpayers.

“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 ring fence,” Osborne said in a speech in Bournemouth.

The British Bankers' Association (BBA) said the new bill would bring “uncertainty for investors” and make it more difficult for banks to raise capital, leaving them with less available money to lend to the private sector. Anthony Browne, chief executive of the BBA has warned that moving away from the universal model of banking will compromise banks' abilities to provide all the services British businesses will require.

For the time being regulators will only have the power to split up individual non-compliant banks, rather than a complete industry-wide separation. However, there have already been calls to give regulators sweeping powers over the ring fence.

The new bill comes in the wake of the Independent Commission on banking, whose chairman Sir John Vickers has already announced that he “would not resist” a complete break up of banks if the proposed ring fence fails to achieve its goals.

“When the RBS failed, my predecessor Alastair Darling felt he had no option but to bail the entire thing out. Not just RBS on the high street, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai,” said Osborne.

“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.”