Chancellor George Osbourne
Chancellor George Osbourne to ring fence retail arms of banks REUTERS

George Osbourne is proposing the biggest bank shake up since the 1930's with controversial plans to ring fence retail arms of banks. He is set to face 'formidable opposition' from the banks in what could be one of the most challenging reforms of the banking sector. The Chancellor wants banks to ring fence their retail banking arms to protect the public if their trading and investment arms were to hit serious trouble.

George Osbourne is said to be facing still opposition from the banks as the City does not universally believe that ring fencing one part of any banking sector would create a magic solution for banking problems in the UK.

Under the Chancellor's plans, banks will be forced to ring fence their retail operations, with no bank with a retail arm allowed to opt out of this proposals. The Treasury want to protect branches, loans and public savings so0 that if banks were to get into serious trouble in when trading and investing, public money would be safe and huge bail out packages could become a thing of the past.

The plan will centre on the amount of capital banks have to hold. At the moment, banks have to hold around 7% of capital - set out by an international minimum rate. There has been no official figure set out by Chancellor but a Treasury spokesperson said that '10 per cent is in the right ball park.'

The Chancellor is set for a run in with bank bosses over the new reforms of the banking sector. Banks do not believe that ring fencing public savings and loans would in any way protect against the problems banks face on a day to day. The plans have been met with contempt in the City and analysts are unclear how these proposals will make the banking sector 'risk free.' Furthermore there is a view that these proposals will actually make it more expensive to bank - with large banks having to put large pots of capital into investment and retail arms.

The Chancellor is also set to announce the privatisation of Northern Rock. George Osbourne is ready to relinquish co0ntrol of half of the bank with the other half still owned by the state. George Osbourne has insisted the bank has been split into a 'good bank' and a 'bad bank.' The 'good bank' has savings and over 70 branches whilst the 'bad bank' has toxic loans and will remain under state control.