George Osborne last night backed plans to prevent a fresh financial crisis by forcing banks to erect protective “firewalls” around their retail arms.

The Chancellor used his annual Mansion House speech to endorse proposals for internal divisions at High Street banks so they cannot be crippled by failures in their “casino” investment operations. He also signalled that the process of selling off the Government’s massive stake in banks was starting – with a buyer being sought for Northern Rock by the end of the year.

Mr Osborne said UK plc had faced a series of “headwinds” domestically and internationally over the past year. But pointing to encouraging unemployment figures, he insisted the economy was “on the mend”.

The Chancellor set out a “new settlement” for financial services that would allow the City to maintain its position as a global leader “without putting at risk the entire economy”.

“As a global financial centre that generates hundreds of thousands of jobs, a successful banking and financial services industry is clearly in our national economic interests. But we cannot afford to let it pose a risk to the stability and prosperity of the nation’s entire economy... We should be clear that we want Britain to be the home of some of the world’s leading banks, but those banks cannot be underwritten by the British taxpayer.” the Chancellor said. Mr Osborne added: “The Independent Commission on Banking has put forward two particularly important proposals. Bail-in instead of bail-out – so that private investors, not taxpayers, bear the losses if things go wrong. And a ring-fence around better capitalised high street banks to make them safer, and to protect their vital services to the economy if things go wrong.