The recommendations include ring-fencing retail banking from investment banking and requiring banks to hold greater cash buffers against potential loss or future financial crises.
Mr Osborne also announced that the state-owned Royal Bank of Scotland (RBS) would reduce the size of its investment bank, saying that RBS must "go further" in shrinking its global banking and markets division, which was largely blamed for losses that led to the lender's collapse in October 2008.
The Chancellor said: "We believe RBS's future is as a major UK bank, with the majority of its business in the UK and in personal, SME and corporate banking, adding that RBS would have to scale back its "riskier activities that are heavy users of capital or funding".
Mr Osborne said: "Our objective is clear. We want to separate high street banking from investment banking, to protect the British economy, protect British taxpayers and make sure that nothing is too big too fail.
"Second, we will make sure the banks have bigger cushions so they are better able to withstand losses."
While accepting the changes would cost the industry £3.5bn to £8bn a year, Mr Osborne said that the costs would be "far outweighed" by the benefit to the economy of avoiding future financial crises. He said these could reach £9.5bn a year on "modest" assumptions.
However, John Longworth, director general of the British Chambers of Commerce (BCC), said the reforms in themselves would not help the wider problem of businesses gaining access to bank lending.
"Businesses still find it difficult to get access to capital, or capital on reasonable terms, in what is a highly risk-averse environment.
"Given the timescales for the implementation of credit easing, the time may now have come for the government to consider the introduction of an SME bank."
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