Osborne to back plans to split banks' functions

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George Osborne will tonight endorse proposals to force the big banks to ring-fence their high street and investment arms.

In his annual Mansion House speech, the Chancellor will accept recommendations from the Independent Commission on Banking designed to learn lessons from the financial crisis by making the banks safer. In its interim report in April, the commission, chaired by Sir John Vickers, stopped short of saying the banks should be broken up but called for their retail and investment operations to be ring-fenced.

A Treasury source said last night: "This is a far-reaching shake-up to make high-street banks safer and protect taxpayers. The Government set up the banking commission to ask the difficult questions that weren't asked before the crisis and this is right at the heart of their answer."

Mr Osborne will admit that the economy is in choppy waters but will again insist there is no alternative to sticking to the tough deficit reduction strategy he set out in his emergency Budget a year ago.

Although a cross-party consensus in favour of the commission's plan is emerging, some Liberal Democrats felt the banks had been let off the hook and were disappointed that the proposed separation of their functions was not more radical.

The commission is due to present its final report in September.