George Osborne has 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 on Monday, 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."