Speaking just before the Banking Reform Bill began its journey through parliament, Osborne confirmed that the legislation contained powers for the state to enforce a split of an institution's retail and investment banking operations if the bank flouts new rules stipulating the operational and capital separation of its retail banking activities from investment banking.

Osborne's inclusion in the legislation of the so-called electrified ring-fence adopts the key pre-Christmas proposal of an influential parliamentary committee and allows him to counter opposition suggestions that his party remains soft on banks.

The surprise move drew criticism from the British Bankers' Association, whose CEO Anthony Browne said it would undermine lending and hurt London as a financial center.

But Gibson, Dunn & Crutcher LLP banking partner Tom Budd said the "electrified ring-fence" could turn out to be less serious than feared. The decision "is partly presentational," he said. "It enables Osborne to say he is being hard on banks, he is being receptive to the public mood and that the ring-fence provision is important to him."

The ring-fence, which includes a capital buffer around banks' retail units, builds on a September 2011 report from the Independent Commission on Banking. It forms the centerpiece of the new legislation and is designed to ensure the government is never again on the hook for the type of banking rescues it undertook during the credit crisis.

Responding to continued public anger against banks in the wake of the ongoing scandal surrounding Libor rigging, Osborne also said he will make 83% state-owned Royal Bank of Scotland Group plc claw back the U.S. portion of the expected £500 million ($787 million) Libor settlement from bankers' bonuses. And he plans to bring forward proposals to open up the payment systems market.

The publication of the Banking Reform Bill brings to an end the first phase of furious lobbying from the banking sector, but given that the nature of activities that will fall inside the ring-fence will be determined in secondary legislation, the industry will continue to argue hard for as lenient a regime as possible.

Pinsent Masons LLP banking partner Tony Anderson noted the U.K. is alone in the world in implementing a ring-fence.

Finnish Central Bank Governor Erkki Liikanen last year in a report for the European Commission introduced the idea of ring-fencing banks' trading activities -- in a mirror image of the U.K. focus on retail banking operations. However, recent reports suggest that Brussels regulators are preparing to water down those proposals.

"This is a further compliance burden a global bank that continues to operate in the U.K. will have to bear," said Anderson, of the U.K. situation.

Deloitte LLP regulatory strategy co-head Clifford Smout noted: "How the regulator will monitor compliance and respond to any attempt to breach the ring-fence will be important, as will the role of government, who have the final say on whether to force a breakup in any individual case. As always, the devil is in the detail."

Osborne wants the bill to become law by early next year, but key provisions of the legislation won't kick in immediately.