Osborne's banking on radical changes
But the Chancellor's attempts to change the rules of the banking system are under-fire - some are arguing that he has gone too far, while Labour say he hasn't gone far enough
George Osborne vowed that 2013 will be the year when the banking system is "reset", with new powers to break up the banks if they do not follow rules to ring-fence risky operations from savers' deposits.
Outlining the Government's Banking Reform Bill, which went to Parliament earlier this week, the Chancellor told bankers in Bournemouth that there would be no more "too big to fail" and unveiled payment reforms to speed up the banking system.
His comments look set to incur the wrath of the City after he pledged to introduce powers to "electrify the ring-fence" if lenders fail to split high street branch operations from the dealing floor.
The Bill has reignited fears that Britain's biggest banks could move abroad, with the British Bankers' Association (BBA) warning the plans will damage London's "attractiveness as a global financial centre".
The Chancellor also signalled that the forthcoming fine for Royal Bank of Scotland (RBS) as part of the Libor-rigging scandal will be paid out of the bonuses of investment banking staff.
He said: "Any UK fine will benefit the public. And when it comes to RBS, I am clear that the bill for any US fine related to this investigation should on this occasion be paid for by the bankers, and not the taxpayer."
Outlining the Banking Reform Bill in a speech at JP Morgan in Bournemouth, Mr Osborne said: "2013 is the year when we re-set our banking system.
"So the banks work for their customers – and not the other way round.
"So that those who guard over the banks to keep our economy safe are the right people with the right weapons to do the job.
"And so that when mistakes are made, it's the banks and not the taxpayer that picks up the bill."
He said he wanted to open up the payment system to ensure new players could access the system in a "fair and transparent" way, and so that customers and businesses would be able to move money around the system more quickly.
It builds on reforms to give banks a strict seven-day deadline to switch customer's current accounts to a rival, which are set to come into force in September.
The Banking Reform Bill follows recommendations by the Independent Commission on Banking (ICB), led by Sir John Vickers in 2011, which came up with ways to make the sector safer and give greater protection to depositors in the wake of the financial crisis.
The Parliamentary Commission on Banking Standards (PCBS), set up in the wake of the Libor scandal, also called for reserve powers to break up the banks if they do not adhere to rules to separate investment and high street operations.
But BBA chief executive Anthony Browne said this would make it more difficult for banks to raise capital to lend to businesses and would also create uncertainty for investors.
He said: "No other major economy is considering moving away from the universal model of banking because it undermines banks' ability to provide all the services businesses need.
"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."
And Carla Antunes-Silva, analyst at Credit Suisse, said that tighter scrutiny to strictly implement a ring-fence could increase the overall costs of reform for the industry. But Mr Osborne said: "When the RBS failed, my predecessor Alistair 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.
"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."
Mr Osborne also confirmed plans to set up a new watchdog and hand back responsibility to the Bank of England to keep the banking system safe, which he said would be the "super cop" of the financial system.
He said: "The fire alarm was ringing, but no one was listening. And when the crisis hit, the fire was then so great that the whole economy was sacrificed to put it out. The British people need to know that lessons have been learnt. And they have."
Under the Bill, investment and high street banks will have different bosses and a new watchdog will be set up with "real teeth".
Shadow chancellor Ed Balls said: "For all the rhetoric and the partial climbdown he has been forced into, George Osborne is still failing to deliver the radical banking reform we need.
"He is refusing to legislate for a backstop power to allow for across-the-board separation of the banks, as Andrew Tyrie's commission and Labour called for last year. He has refused to repeat Labour's tax on bank bonuses or implement our legislation on pay transparency.
"And he has failed to get the banks to lend to businesses, with net lending to small firms falling month by month.
"In the coming weeks we will be challenging George Osborne to go further and back amendments to this Bill that would fully implement the recommendations of the Parliamentary Commission on Banking Standards.
"If the Chancellor fails to support them, it will be clear that he is unwilling to deliver the radical change we need."