Banks will be forced to ring-fence savers' cash from their risky casino-style investment arms to protect deposits and avoid a run like that which brought down Northern Rock in 2007.
Chancellor George Osborne (right) will unveil his long-awaited banking White Paper today in an attempt to make the sector safer.
- Banks' savings and investments arms to be split
- Move to protect savers' cash
- Banks warn borrowing costs could rise
Recommendations by the Independent Commission on Banking (ICB) last year called for the splitting of retail and investment units.
Banks say the move could drive up borrowing costs for consumers.
However, Osborne is giving an important concession to banks angered by the proposals, as smaller institutions will be exempt, as will overseas operations that are not considered a threat.
The legislation will not come into force until 2015, if it is approved by Parliament, though the proposals are still open for consultation. Banks must only comply with the rules by 2019.
In his annual Mansion House speech tonight, Osborne will say: "We've got to stop problems here in the City of London spilling onto our high streets and putting taxpayers' money at risk.
"High-street banking will be ring-fenced so taxpayers are better protected when things go wrong."
What will this mean for consumers?
While the move will protect savers' deposits against banks gambling away their cash, it will mean little difference to their everyday banking.
Treasury sources have told MoneySavingExpert.com that branches and banks' websites can continue to sell savings, mortgages, current accounts and investments in the same way.
The difference will be behind the scenes as risky investments will be held in a separate pot to savers' money. Risky loans and mortgages will also be held separately.
The banking sector argues the plan 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 investments.
This is because savers would get their money first if a bank went bust.
The British Bankers' Association argues the depositor guarantee scheme — under which £85,000 of deposits per person is insured — is adequate to offer consumer protection.
Angela Knight, chief executive of the British Bankers' Association, warns: "A growing economy requires a vibrant banking sector to finance it.
"This is not special pleading on behalf of the industry, it is special pleading on behalf of the country."
Richard Lloyd, executive director of consumer group Which?, says: "The plans should be a major step towards restoring consumer confidence and transforming the culture of banking.
"The Government also must ensure the competition recommendations of the ICB are fully enacted and seize this opportunity to increase competition and choice on the high street.
"Without decisive action, consumers will continue to pay the price for a lack of competition."