Britain said Tuesday it will force state-rescued Royal Bank of Scotland and Lloyds to sell assets in a bid to revive the sector and address EU concerns, and will inject another 30 billion pounds into them.
The government hopes to create new banks, promote competition and guarantee more lending to businesses and individuals as a result of the sale, which will add up to around 10 percent of Britain's troubled retail banking market.
In return for the state aid, the two banks will have to cut their bonuses.
"We're creating more competition in banking, we're making sure our banks are built on a more solid basis," said British Prime Minister Gordon Brown, who expressed confidence that state funds would be repaid in the long term.
"I believe at the end of the day the banks will be paying money to the British public and not the other way round," he added.
The news comes one week after the European Commission approved the state aid in plans to break up and sell Britain's nationalised bank Northern Rock.
EU regulators last week also required an overhaul of Dutch group ING.
"To promote greater competition in UK banking, and meet EU state aid rules, the banks will... be required to make divestments of significant parts of their businesses over the next four years," the Treasury said in a statement.
Both RBS and Lloyds, which were bailed out at the height of the global financial crisis, must meet "tough" requirements on bonuses and lending in return for the funds, equivalent to 49 billion dollars (33 billion euros).
"We are going to see at least three new banks operating on the British high street in the next four years and that is very good news for the British taxpayer, the British consumer," Treasury Minister Lord Myners told the BBC.
Under the plans, the British government will pump another 25.5 billion pounds into Royal Bank of Scotland, which in turn will place 282 billion pounds of high-risk debts into the government's toxic asset insurance scheme.
The state's economic interest in RBS will climb to 84 percent.
Lloyds meanwhile unveiled fundraising plans set to include a record 13.5-billion-pound rights issue -- which would represent Britain's biggest-ever sale of new shares to existing shareholders.
The government said it would take part and maintain its 43-percent stake in Lloyds.
The combined RBS and LBG investments announced on Tuesday would therefore total just over 30 billion pounds. In addition, RBS will have access to a contingency fund of eight billion pounds.
Royal Bank of Scotland will sell its RBS-branded branches in England and Wales, and NatWest branches in Scotland, as well as its Churchill and Direct Line insurance division and parts of its investment banking arm.
Ahead of Tuesday's announcement, RBS had revealed on Monday that it would axe about 3,700 jobs across its British retail operations.
Lloyds Banking Group said it would offload Lloyds branches in Scotland, its Cheltenham & Gloucester branches, and the Intelligent Finance online unit.
"UK consumers will in theory enjoy increased choice and lower pricing, while rivals such as HSBC will be glad to see their rivals paying for their mistakes," said analyst Keith Bowman at Hargreaves Lansdown stockbrokers.
The Treasury has meanwhile reached agreement "in principle" with EU Competition Commissioner Neelie Kroes over the restructuring.
"The government has reached agreement in principle with Commissioner Kroes after constructive and helpful discussions," it said.
Regulatory authorities are concerned that such state-backed banks have an unfair advantage over other institutions that weathered the global financial storm without government aid, like Barclays and HSBC.
