The Labour shadow chancellor, Ed Balls, has called for a “root and branch” reform of the banking sector and said that two new challenger bank needs to be created to provide competition to the “big five.”
Mr Balls believes that Barclays, HSBC, Lloyds, Santander and NatWest should be forced to sell off some of their branches to create alternatives to create competition and boost lending to businesses.
Lloyds is already committed to selling over 600 branches but Labour believes that more branches should be sold off between the big five high street banks to create two new competitors by 2015.
Labour’s call comes after a tumultuous week in banking that saw three top executives from Barclays resign, including its chief executive Bob Diamond, following a report by both US and UK regulators that found the bank guilty of manipulating the Libor interbank rate.
The government has launched an inquiry that saw Mr Diamond appear before a Treasury Select Committee on Wednesday but Labour says it falls short of the judge-led independent inquiry it believes is required.
On Thursday, Labour voted against the creation of a parliamentary-led investigation after its own bid to initiate a judge-led inquiry was defeated by the government with a majority of 81.
The government’s motion was passed by 330 voted to 226. The government inquiry will be led by a committee of MPs and peers.
On Friday, the Serious Fraud Office announced that it is to launch a formal investigation.
Ed Balls has called for Mr Diamond not to accept the severance payment that he is expected to be offered by Barclays.
Appearing on the BBC’s Andrew Marr Show this morning, Mr Balls said:” People will look at that and think that is totally outrageous. It is outrageous that somebody should stand aside because the board decides there is a problem and then get a payout which is off the scale for anything normal people will receive in their lifetimes.
"The shareholders are going to think really hard about this. The government will need to look at this and talk to the shareholders. They clearly talked to the shareholders about Mr Diamond."
Mr Balls criticised the role of the Serious Fraud Office on the programme, saying: "The reason why people are so angry is they think when people avoid their taxes or cheat on benefits they get sentences in jail.
"But when bankers do massive multi-million or billion pound frauds, there aren't criminal prosecutions.
"And the government should have acted. And I think the Fraud Office has been very, very tardy on this."
However, the coalition’s Business Secretary, Vince Cable defended the government, saying that the government is already taking a number of steps to reform the banking sector.
Mr Cable said: "The real problem at the moment is that the banks – because of their existing culture which is frankly anti-business, obsession with short-term trading profits, not focusing on the long term – are throttling the recovery of British industry."