GEORGE OSBORNE, the shadow chancellor, will this week publish his “white paper” on banking regulation, pledging to scrap the existing triparite system and the Financial Services Authority and hand back supervision to the Bank of England.

His proposals, due tomorrow, are more keenly awaited in the City than most opposition statements, because the Tories are expected to take power next year.

Osborne will float the idea of a separate markets regulator, similar to America’s Securities and Exchange Commission, in addition to the Bank’s new supervisory role and a new consumer regulator for the financial-services industry, though no firm decision has yet been taken on this.

He will be clear, however, that the Bank should have powers to order banks and other financial institutions to hold more capital when times are good, so that they are well-placed to cope with the losses that arise during downturns.

These counter-cyclical capital requirements, one version of which was the so-called dynamic provisioning used for Spain’s banks, are seen by Mervyn King, the Bank governor, as an essential part of the “macro-prudential” toolkit.

The most controversial part of Osborne’s proposals, however, will be his response to the “too big to fail” problem for banks. He is expected to back King’s view, set out last month, that large and complex banks that combine retail banking with risky investment banking, should either not have their deposits guaranteed by the taxpayer or be discouraged by even larger capital requirements.

Osborne will make clear that he believes some banks were allowed to become too big. He will give the Bank the powers to intervene – and, if necessary, break up – banks whose size and structure threatens financial stability.

Vince Cable will also outline his blueprint to shake up Britain’s banking system tomorrow at the London Stock Exchange. The deputy leader of the Liberal Democrats will call for the government to break up the banks and end taxpayer guarantees for casino banking.

Cable told the Sunday Times: “It is the unavoidable issue which the government and people in the City seem to be determined to avoid – but we cannot accept a continuation of taxpayers underwriting global investment banking.

“The only way to stop it is to break up the banks, starting with those that have been semi-nationalised.” The move would see the banks split off their retail divisions from their riskier commercial arms.

Cable will also accuse the Conservatives of “mischief making in a turf dispute between two quangos” with its proposal to overhaul the tripartite regulatory system and hand more power to the Bank of England. He will say the Bank should retain overall responsibility for financial stability but the FSA should continue to play a key role.

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