George Osborne to reveal plans for major shake-up of banking

In his annual Mansion House speech today, the Chancellor will say that he has accepted the key recommendations of the interim report, drawn up by the commission led by Sir John Vickers, which will force banks to make their retail operations "bulletproof".

The reform is the first major step in tackling the issues raised by the collapse of the banking system in 2008 which started with Northern Rock being nationalised, Halifax Bank of Scotland being taken over by Lloyds Banking Group and then both Lloyds and the Royal Bank of Scotland (RBS) being bailed out by the government.

The crisis, which almost saw the complete collapse of the banks and the first run on a bank in a century, saw 37 billion shelled out to prop up RBS and Lloyds alone.

Currently the taxpayer owns 83 per cent of RBS and about 41 per cent of Lloyds.

Osborne's decision to accept the Vickers recommendations means that banks such as RBS, Lloyds, Barclays and HSBC will no longer be able to speculate using customers' savings and mortgages as these will be "ringfenced" from wholesale banking operations.

The announcement will provoke consternation among the big banks who have questioned how it can be achieved, but will also bring added relief to those who feared the Chancellor might push for full separation of the different parts of the banks.

The Chancellor will make it clear that he accepts the report's suggestion of subsidiarisation rather than complete break up of the banks.

This means that in effect two separate business will operate as subsidiaries of the same bank but there will be an invisible wall in between them.

The details of how this will work are due to be drawn up in the final Vickers Report which is to be published by the Independent Commission (ICB) on Banking on 12 September this year.

Osborne will also announce that he has accepted another key recommendation from the ICB report which means that banks will have to guarantee themselves with a much higher level of capital.

The interim report in April recommended that this should be three per cent above the current minimum level.

However, the final detail will also come out in the report in September.

Last night a Treasury source said: "This is a far reaching shake up to make high street banks safer and protect taxpayers.

"The government set up the banking commission to ask the difficult questions that weren't asked before the crisis and this is right at the heart of their answer. Britain is now leading the world in learning the lessons from the disastrous failures of the last decade."

However, it was unclear last night whether another major area of contention - the forced sale of more Lloyds branches on top of the 632 it has sold already - would also be accepted.

Osborne is also due to make some comments on the state of the economy in general.

He will claim that the recent comments by the International Monetary Fund (IMF) and continuing sovereign debt crises in Greece and Portugal show that his plans to slash public spending by 80bn as well as raise taxes by 20bn in the next four years is the correct one.

He will also try to make reassurances on economic growth levels which have flatlined this year.