Give away £34bn RBS and Lloyds bank shares to taxpayers, George Osborne told

The Coalition should embark on the largest privatisation ever seen in the UK and hand shares in state-owned banks to taxpayers ahead of the next general election, the Chancellor's favourite think tank has claimed.

Some £34bn of the Government's £48bn holding in Lloyds Banking Group and Royal Bank of Scotland should be put in the hands 48 million Britons. By doing so, policymakers would "strengthen the banks and allow them to compete on a fully commercial basis", Policy Exchange said in a report published today.

The radical plan, which is likely to raise eyebrows across the City, would see up to 55 per cent of RBS's shares and 30 per cent of Lloyds's given to the public for free. Every British resident over the age of 18 with a National Insurance number would receive up to £1,650 worth of shares, which would be repaid to Government when they are sold with taxpayers holding on to any profits.

But others suggest George Osborne is planning an early sale of shares in Lloyds Banking Group that could raise up to £17bn. The Sunday Times reported that the Chancellor is expected to use his Mansion House speech on 19 June to reveal the sale of the state's 39 per cent stake. It claims he will use an offer of discounted shares, rather than give the shares away as the Policy Exchange report recommends.

A sale would offer the shares at a discount to the price available to big institutions and pension funds and could include incentives for investors to hold on to the shares rather than sell immediately.

But the Policy Exchange claims other options to privatise the banks within two years are "flawed". James Barty, a former investment banker and author of the Policy Exchange report, said: "A floor price would be established at the original level the shares are sold.

"If the share price falls under the floor, no one will want to sell. As a result taxpayers would take the profits from any rise in the share price above the floor price but would not lose any money if the share price dropped below the floor price.

The privatisation would be accompanied by a sell-off of the remaining shares to institutional and retail investors, the Policy Exchange said.

Mr Barty added: "A distribution to taxpayers with the Government to be repaid on sale, combined with an institutional and retail placing, is the only option that allows almost all the Government's stake in the banks to be sold ahead of a 2015 election. This proposal will create a whole new generation of shareholders. We urge the Chancellor to take on the doubters and move ahead with this scheme."

A straight share giveaway would increase the national debt by approximately £50bn and could also place significant pressure on the share price as many of those receiving the shares are likely to sell out immediately.

Meanwhile, a traditional privatisation like the "Tell Sid" sell-offs of BT and British Gas, would also only be attractive to investors at a sizeable discount. Such a discount would have to be offered to all EU citizens under EU law.

The report comes ahead of the publication of the Parliamentary Commission on Banking Standards this week. The commission is predicted to recommend that the Royal Bank of Scotland should be split into a "good" bank, shorn of billions of pounds of risky loans, and a "bad" bank.