Ed Balls Ed Miliband
Ed Miliband and Ed Balls said Labour will not vote for the government's plans for a parliamentary inquiry into banking (Reuters)

Labour leader Ed Miliband, his shadow chancellor Ed Balls, and their backbenchers will vote against having a parliamentary inquiry into banking in the wake of the Libor rate-fixing scandal - but will continue to push for a judge-led public probe instead.

Balls told MPs gathered for a debate on the government's proposed parliamentary inquiry that that the Conservatives' coalition partners the Liberal Democrats should "think hard" about voting against the government's plans and backing Labour's motion calling for a public inquiry.

A vote will take place after the debate in the early evening.

"Trust in our banks is in tatters. The public rightly want answers and actions to stop this happening again," the shadow chancellor said in the House of Commons.

The government argues that the banking inquiry must be parliamentary as it will be quicker and cheaper than having a judicial inquiry.

Prime Minister David Cameron has said he wants the inquiry to conclude before his Finance Bill on banking reform is debated in parliament in order to put any recommendations into the legislation.

Balls said that the inquiry can only be "independent and objective" if it was public rather than parliamentary.

Labour has offered a compromise that would see a public inquiry split into two halves.

The first half would scrutinise the Libor rate-setting system and the scandal engulfing it and could conclude by the end of the year.

A second half, to take place once the Finance Bill reaches parliament, would explore the culture and standards within the banking industry.

The government has rejected this.

Andrew Tyrie, the Conservative MP for Chichester and chairman of the Treasury Select Committee, was chosen by the government to lead a parliamentary inquiry, which would have a joint committee of MPs and peers.

Tyrie has said that if there is not cross party support for an inquiry then he would not lead it.

A recent investigation by the Financial Services Authority (FSA) exposed attempts to fraudulently fix interest rates by traders at Barclays bank.

They got submitters at the bank, who report the interest rates at which the financial institution is able to borrow from its rivals, to fudge their figures down slightly.

These submissions help form the Libor rate, which is calculated from all banks' submissions.

Libor, short for the London Interbank Offered Rate, is sometimes used to inform rates elsewhere, such as on business loans and mortgages.

Barclays was handed the City of London's biggest ever fine of £59.5m.

Other big British banks, such as Lloyds and HSBC, have also been accused of attempting to manipulate interest rates for their gain and are under investigation by the FSA.

Bob Diamond, former chief executive of Barclays who was forced to resign because of the scandal, faced questioning from MPs on the Treasury Select Committee.

Diamond insisted that he only found out about the rate-fixing at his bank when the FSA published the findings of its investigation.

However he had signed the Barclays 2011 Annual Report that had noted the bank was under investigation by regulators across the world on rate-fixing allegations.