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By David Milliken
LONDON, Feb 4 (Reuters) - British banks that fail to guardtheir day-to-day banking from risky investment activities willface being dismantled, finance minister George Osborne is set tosay later on Monday.
Britain is in the midst of a big shake-up of its system ofbank regulation in the wake of the 2008 financial crisis, when65 billion pounds ($102 billion) of public money was needed toshore up Royal Bank of Scotland and Lloyds Banking Group.
Banks are already expected to have to 'ring-fence'activities such as standard bank accounts and payments fromriskier investment banking -- something which will hit majorplayers such as Barclays, HSBC and RBS.
But Osborne says in excerpts of a speech provided by hisoffice that he is prepared to go further and break up bankswhich fail to keep to the rules -- a key demand of lawmakers whoreviewed government plans late last year.
"If a bank flouts the rules, the regulator and the Treasurywill have the power to break it up altogether - full separation,not just a ring fence," Osborne says. "In the jargon, we will'electrify the ring fence'."
Under the new rules, the Bank of England will be responsiblefor monitoring whether banks ensure that risks taken by theirinvestment banking arms do not endanger their retail sides.
If the BoE identifies a breach, the final politicallysensitive decision on whether a bank should be forced to selloff one of the two arms will be taken by the government.
UNCERTAIN LEVERAGE
Legislation will go to parliament later on Monday, and inhis speech Osborne is also expected to detail new rules onlimits to banks' leverage.
Under the most recent plans, leverage was to be set at 33times banks' capital, weaker than an original proposal for amaximum of 25 times.
In December, a cross-party group of lawmakers reviewing theplans said it was "not persuaded by the government's relaxation"of the leverage rule and added that the Bank of England shouldset the leverage cap.
Osborne's plans are politically controversial at a time ofpublic anger at banks, which continue to face the repercussionsfrom scandals related to mis-selling insurance and misreportingLIBOR interest rates.
The opposition Labour Party said it was concerned thatOsborne would not revert to the original proposal, and also thatbreaking up banks would only be possible on a bank-by-bankbasis, rather than for the entire industry.
"If ... the Chancellor is planning to stop short on both thebackstop powers and legislation for the leverage ratio, thenthere will be a very real sense ... that despite all therhetoric the Chancellor hasn't got the appetite for the radicalbanking reform we need," Labour lawmaker Chris Leslie said.
But Osborne -- who will deliver his speech at U.S.investment bank J.P. Morgan's offices in the southernEnglish city Bournemouth -- insists his reforms strike the rightbalance between responding to public anger and avoiding apopulist overreaction.
"Our country has paid a higher price than any other majoreconomy for what went so badly wrong in our banking system. Theanger people feel is very real. Let's turn that anger from aforce of destruction into a force for change," he says.
"Any bunch of politicians can bash the banks ... but whatgood would that do our country? The jobs, the investment, thebanking system we all need would go with it."
