George Osborne makes ex-OFT chief head of banks break-up inquiry

Sir John Vickers will spend up to a year studying whether Britain's biggest banks should be forced to separate retail and investment banking arms.

Chancellor George Osborne was expected to announce the appointment in his first Mansion House speech tonight. A former chief economist at the Bank of England, Sir John has been described as "a man of substance" by banking leaders.

The formation of the independent banking commission was agreed as a compromise between Tories and their coalition partners, the Liberal Democrats, who disagreed over the need to split the banks.

Osborne will also use tonight's speech to tell the banks they must boost lending to firms and repay the public money that rescued them in the credit crunch.

The Chancellor was also expected to confirm at the black-tie dinner in the City that the Bank of England and its governor Mervyn King would be put in charge of cracking down on excessive risk-taking by bankers.

This means a downgrading of the role played by the Financial Services Authority, the independent regulator set up by Gordon Brown.

However, Mr Osborne has backed away from scrapping the FSA, whose chief executive Hector Sants is to leave in the summer after three years.

Bank chiefs are expecting Mr Osborne to reveal more details on how the coalition will approach Liberal Democrat calls to break up big banks. A commission is expected to take a year to report on splitting up investment banking from high street banking, effectively postponing action for the time being. The Future of Banking Commission, set up by consumer group Which? to investigate the sector, called for a "profound reform" of the UK's banking system in a report this week.

Mr Osborne is expected to float proposals for new powers to tackle risky lending to homebuyers at a forthcoming summit of the G20 nations. These include possible plans to restrict individual mortgages to 75 per cent of a property value in some cases, compared with loans of 125 per cent just before the credit crunch.

Melanie Bien, director at mortgage broker Private Finance, said: "Lenders have already significantly reduced the maximum loan-to-value they are prepared to advance so a cap imposed by the Bank of England comes a bit late in the day.

"However, it is important that action is not taken which would hamper the recovery and restricting families from borrowing more than say, 75 per cent LTV, would mean that many would struggle to buy the home they need."