Britain's biggest banks will face complete separation if they flout new rules to ring-fence risky operations from savers' deposits, the Chancellor will announce today.
The legislation will give the Government and a new banking watchdog powers to "electrify the ring-fence" if banks fail to split high street branch operations from the dealing floor.
Launching the Banking Reform Bill today, George Osborne will tell traders at JP Morgan there will be no more "too big to fail".
It comes after the Parliamentary Commission on Banking Standards called for a reserve power for full separation if banks did not implement reforms.
Mr Osborne had warned the Commission against "unpicking the consensus" over reform proposals in the Bill, but appears to have heeded their warnings that loopholes could easily develop.
Sir John Vickers, who chaired the Independent Commission on Banking, has also said he "would not resist" a complete break-up of banks if so-called ring-fencing fails to achieve its desired effect.
But the announcement will put the Chancellor on a collision course with the banks.
Anthony Browne, chief executive of the British Bankers' Association, said: "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."
But Mr Osborne countered: "When the RBS failed, my predecessor Alastair Darling felt he had no option but to bail the entire thing out.
"I want to make sure that the next time a Chancellor faces that decision they have a choice. To keep the bank branches going, the cash machines operating, while letting the investment arm fail."