Savers will be given greater protection if a bank collapses under long-awaited proposals due to be announced by the Government tomorrow.
Chancellor George Osborne's banking white paper follows last year's recommendations by the Independent Commission on Banking (ICB), led by Sir John Vickers, on how to make the sector safer and give extra security to savers.
Ahead of the Chancellor's annual Mansion House speech tomorrow evening, Mr Osborne is expected to press ahead with the ICB's more contentious proposals that will see individual depositors ranked above bondholders and corporate creditors when it comes to recovering cash owed after a bank failure.
But he is considering an important concession to banks angered by ICB proposals to ring-fence depositor cash from riskier operations and investment banking.
The Government is planning to broaden the range of activities allowed within ring-fenced businesses.
This could include simple hedging tools, such as those to protect consumers from interest rate and currency fluctuations, as well as loans to small businesses.
The move is likely to be welcomed by banks, which have lobbied hard for a wider scope of allowed activities.
But the Government is not shying away from key plans put forward by the Vickers commission to give savers preference.
The banking sector has argued it would push up the cost of business loans and mortgages, as bondholders could demand banks pay higher interest rates to offset the greater risk they face on bank investments.
The British Bankers' Association argues that the depositor guarantee scheme - under which £85,000 of deposits per person is insured - is adequate to offer consumer protection.
The plans will remain open for further consultation before draft legislation due in the autumn, with plans for the final legislation to be in place by the 2015 election, which will allow the reforms to be enacted.
Some changes to the system are already being phased in, with a final deadline for all reforms to be in place by 2019.
Business advisory firm Deloitte welcomed the prospect of greater clarity on banking reforms.
David Strachan, co-head of the Deloitte centre for regulatory strategy, said: "So far, banks are understandably holding off committing to the design of a ring-fence that may ultimately not meet the Government's criteria.
"Given the complexities and execution risks involved in restructuring of this magnitude, it's essential that banks and investors first get the clarity they need and then there is enough time for the banks to implement all this properly."
The white paper comes after the ICB published its final report last September after being appointed to look at reforms in June 2010.
Alongside the ring-fencing and depositor protection recommendations, the ICB also proposed that banks should set aside more capital to cushion them from potential future banking crises.
This is paving the way for new rules requiring banks to hold equity capital of 10% - some three percentage points higher than the level proposed in the international Basel III agreement.
The ICB also wanted bank account switching to be made easier to improve competition in the sector.