The government hopes to raise about £1bn from the sale Northern Rock is to be sold to a single buyer to raise about £1bn, Chancellor George Osborne is to announce.
He has rejected the other options of floating the bank on the stock exchange or remutualising it.
He will also say in his Mansion House speech he is to force banks to ring-fence retail from investment banking.
He will say banks must be set up so that their High Street branches and savings and loans would not be damaged if their trading arms ran into trouble.
The legal separation of the functions of big banks was recommended by the Independent Commission on Banking.
The auction of Northern Rock is expected to raise about £1bn, which is less than the £1.4bn the government injected into the bank, although not all of it is to be sold.
The former mutual has been split into a “good bank”, containing customers’ savings and about 70 branches, and a “bad bank” containing the more toxic loans.
The former is set to be sold, while the latter will continue to be owned by the Treasury.
“The chancellor hopes that the sale of Northern Rock will send a powerful signal that the banking industry is on a path back to more normal conditions, following the crisis of three years ago”
However, shadow chancellor Ed Balls called for Northern Rock to be mutualised rather than sold off, and accused Mr Osborne of failing to give the option serious consideration.
BBC business editor Robert Peston said that the chancellor opted for an outright sale because he was advised by UKFI, controls the government’s stakes in banks, and Deutsche Bank that this would raise twice as much for taxpayers as a flotation or mutualisation.
Having said that, Northern Rock may still be remutualised because the Treasury expects to receive bids from Yorkshire Building Society and from Coventry Building Society.
Other possible bidders include Sir Richard Branson’s Virgin Money and NBNK, the company set up last year to buy banks, although both Virgin and NBNK are more interested in buying Verde, the much bigger banking business that Lloyds is being forced to sell.
Robert Peston said the restructuring of banks to protect their retail businesses would represent “the most significant reform to our banking system since Big Bang in 1986 made it much easier for our giant banks to buy stock brokers and become huge in investment banking”.
Mr Osborne will also say that banks should have to hold more capital to protect themselves against future losses than the new international minimum of 7% of their risky assets.
He will not put a figure on what minimum he will impose, but Treasury sources said that 10% would be “the right ballpark”.
The 10% minimum was another recommendation of the Independent Commission on Banking (ICB) in its interim report in April.
At the time, Mr Osborne welcomed the report, but he has not previously endorsed its findings.
The shadow chancellor, Ed Balls, has also given the commission his backing.
“To protect customers and taxpayers we need tough accountability and transparency and clear, workable and robust firewalls,” he said.
The commission’s final report, which is expected to give details of how banks’ firewalls will work, is due to be published on 12 September.
This article is from the BBC News website. © British Broadcasting Corporation, The BBC is not responsible for the content of external internet sites.