George Osborne has backed plans to shake up the banking industry despite warnings that the move could harm the economy.
The chancellor gave the government's formal approval to ring-fence the country's top retail banks from their riskier investment banking arms, in order to give better protection to taxpayers in case of future financial crises.
"The government will separate retail and investment banking through a ring-fence," he told parliament.
Mr Osborne said that the Independent Commission on Banking (ICB) under Sir John Vickers had been created to find an answer to the "British dilemma" of how the country can remain one of the world's leading financial centres without exposing taxpayers to the massive costs of bailing out failed banks.
He said the Commission had produced an "impressive" final report in September, whose key recommendations he was now committed to putting into effect.
"Britain should remain home to one of the world's leading financial centres and the home of global banks," he said.
The ICB had proposed lenders should be forced to split their retail and investment banking arms to help prevent future bailouts.
The reforms could cost the sector up to £7bn, prompting fears they will slow lending at a time when the economy is in danger of sliding into recession.
The move will also heighten speculation that some banks will move their head offices away from London, depriving the UK of jobs and tax revenues.
The news saw shares in Britain's leading banks fall in early morning trade on Monday.
HSBC was down by 1% and Lloyds dropped 1.8%, while Barclays and the part-nationalised lenders Royal Bank of Scotland both fell 1.9%.
Business Secretary Vince Cable said on Sunday the Government had accepted the recommendations of the commission.
"It is absolutely right that we make the British economy safe. We just cannot risk a repetition of the financial catastrophe we had three years ago," he said.
"Big structural reform of the banks was something we (Liberal Democrats) fought for and argued for and now it is going to happen."
Mr Osborne will make a statement to MPs after the Treasury has published a response to the ICB report, which includes plans to force banks to hold more capital to help ring-fence them against future crises.
He is expected to pledge to enact all primary and secondary legislation stemming from the report by the end of the current Parliament, with a white paper expected next year.
The reforms should be in place by 2019.
The ICB, chaired by Sir John Vickers, former head of the Office of Fair Trading, was set up by the coalition last year to conduct a full review of the sector after the financial crisis four years ago left banks including Royal Bank of Scotland and Lloyds needing bailouts.
Its recommendations have not been universally welcomed.
Commenting ahead of Mr Osborne's announcement, London Mayor Boris Johnson urged the Chancellor: "Just don't kill the goose, don't kill the goose."
However, he added: "There's no doubt that there's something creepy about the huge bonuses that bankers are still continuing to receive in spite of the fact that they were effectively bailed out by the taxpayer. We all want to see them doing more for society."
Others do not believe the Vickers report went far enough.
Tony Greenham, head of finance and business at the New Economics Foundation, said: "We welcome the Government's decision not to water down the Vickers Commission but the ICB's recommendations do not go far or fast enough to stabilise the banking system.
"2019 is a long time to wait for these reforms and leaves the public exposed in the increasingly likely event of another financial crash - we might have to bail banks out again."
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