George Osborne is set to warn Britain's biggest banks that they will face complete separation if they flout new rules to ring-fence risky operations from savers' deposits.

As he launches the Banking Reform Bill, the Chancellor will tell traders at JP Morgan in Bournemouth that there will be no more "too big to fail".

The new legislation will give the Government and a new banking watchdog powers to "electrify the ring-fence" if banks fail to split high street branch operations from the dealing floor.

Mr Osborne will say: "When the RBS failed, my predecessor Alastair Darling felt he had no option but to bail the entire thing out. Not just RBS on the high street, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai.

"I want to make sure that the next time a Chancellor faces that decision they have a choice. To keep the bank branches going, the cash machines operating, while letting the investment arm fail."

It comes after the Parliamentary Commission on Banking Standards, which was set up in the wake of the Libor rate rigging scandal, called for a reserve power for full separation if banks did not implement reforms.

Mr Osborne had previously warned the Commission, against "unpicking the consensus" over reform proposals in the Bill, but now appears to have heeded their warnings that loopholes could easily develop.

But the announcement will put the Chancellor on a collision course with the banks, which claim the legislation will damage London's attractiveness as a global financial centre.

Anthony Browne, chief executive of the British Bankers' Association, said: "This will create uncertainty for investors, making it more difficult for banks to raise capital, which will ultimately mean that banks will have less money to lend to businesses."