LONDON (Reuters) - Britain’s top banks will have to protect their retail businesses from investment banking activities after the government backed a plan to overhaul the industry and shield taxpayers from future losses.Finance minister George Osborne used a speech yesterday to throw his weight behind the ring-fencing proposal, in a move aimed at showing the public that the coalition government is fulfilling its promise to be tough on the banks.Osborne also said he wanted to find a buyer for Northern Rock the bank that nearly collapsed and was fully nationalised during the credit crisis by the end of the year, according to extracts of the speech released by his office.The ring-fencing reforms go further than measures being proposed by other countries, although the capital requirements are not likely to be as tough as in Switzerland.But full specifics of the plan, which aims to shield retail depositors and ensure taxpayers don’t have to bail out the industry in any future crisis by creating much larger capital cushions, have not yet been finalised.“Retail ring fencing would not be our first option, but we can see ways it would work, though clearly there’s a lot more work to do on the details and the specifics,” Barclays chief executive Bob Diamond said.The plan is likely to see domestic banking become a low-risk utility service, while riskier investment banking dubbed “casino banking” will face higher funding costs, potentially forcing some companies to shrink or reshape.“Until we know which entities will issue bonds, and what assets they will finance, we’re miles away from being able to analyse a bond investment in banks,” M&G Financial Institutions research head Tamara Burnell said.While a blow to the banks, some had expected the proposals to be more severe. As now proposed they are unlikely to prompt banks to follow through on threats to leave Britain in favour of lighter-touch regulatory regimes, industry analysts said.“It’s yet more regulation that they’re going to have to deal with, which will impact their profitability,” said Ion-Marc Valahu, fund manager at Geneva-based ClairInvest, which owns Barclays bonds.Shares of HSBC, Barclays and Royal Bank of Scotland, those most affected, all fell by more than one percent after the news that Osborne would use the annual Mansion House speech in the City of London to endorse the plan.Osborne will also address the sale of Northern Rock, which was nationalised three years ago after becoming the first major British bank in more than 150 years to suffer a run.Aggressive lending practices nearly caused its collapse in 2007, as the credit crisis began to bite.Analysts have said Virgin Money, supermarket retailer Tesco’s banking arm and private equity firm JC Flowers may bid for Northern Rock, while mutually owned savings companies such as Coventry Building Society have also expressed interest.The Northern Rock sale is part of a broader push to boost competition in a UK banking market dominated by the “Big Four” of Lloyds, Barclays, RBS and HSBC.The crisis led to Britain having to also bail out Lloyds and RBS, finishing with stakes of 41 percent and 83 percent respectively in those two banks.Osborne said it could still take some time before Britain gets round to selling its holdings in RBS and Lloyds.“It will take some time possibly several years before we can sell them all,” he said.Osborne did not provide details of what assets should be ring-fenced nor on capital levels, but he did make clear the separation should allow retail to keep functioning if investment banking operations are wound down, a Treasury source said.Full details of the planned ring-fencing reforms and other proposals will not be released by the Independent Commission on Banking (ICB) until September 12, and banks and analysts said more details were needed to assess the impact and cost.The ICB, which has stopped short of recommending a full break-up of the banks, expects the ring-fence to be introduced alongside other reforms, such as detailed plans to allow an orderly wind-down of a lender when it hits trouble.Banks should hold a minimum core Tier 1 capital ratio of 10 percent for the UK retail operations, which may be similar to overseas rivals as big global banks face a top-up requirement over the current seven percent global minimum standard.The plan represents a compromise, allowing the Conservative-Liberal Democrat coalition to address public anger against the banks by showing taxpayers that the banks are being reformed, while not harming Britain’s competitive position.