The White Paper was published yesterday afternoon following recommendations put forward by the Independent Commission on Banking and Sir John Vickers.
It proposes to ring-fence retail and investment banking to protect consumers from heavy investment banking losses.
It also proposes that banks should have higher capital and equity requirements than the current seven per cent requirement of Basel III.
Smaller banks with less than £25bn in deposits will be exempt from the ring-fencing requirements to increase competition in the banking sector.
Matthew Fell, Confederation of British Industry director for competitive markets, said: “Businesses want reform that delivers a stable and resilient banking system, but the unrelenting focus must now be on growth. The detail on the timing and implementation of these plans will be critical if we are to ensure that banks can continue to support the economy.
“The proposals for additional capital requirements are above and beyond those already agreed internationally, which will make it harder for banks to lend to businesses. Giving the regulator some flexibility over the design of the ring-fence should help smaller firms access the risk management products they need to support their growth.”
Draft legislation on the proposals will be issued in the autumn and all legislation will be completed by the end of this Parliament in 2015. Banks must comply with the proposed measures by 2019.
Kevin Burrowes, UK financial services leader at PricewaterhouseCoopers, said: “The government and regulators have a big challenge to get a clear, concise and workable set of laws and guidance in place. The banks face the massive task of implementing, conforming and complying.
“The very heavy burden of this regulation and the management effort required to address it could potentially make our banks uncompetitive globally. The rapidly growing financial institutions from emerging markets will seek to exploit the opportunities this gives them.”
David Strachan, co-head of the Deloitte Centre for Regulatory Strategy, said: “It is vital to take the time to get things right. In light of this, it’s welcome there is no longer any reference to banks having to comply with the ring-fence ‘as soon as practically possible’ after the legislation is implemented. This suggests greater flexibility to work through the all important detail and implement a very complex package of reforms properly.”