Mark HobanSavers and taxpayers should never have to "take the pain" again when a bank fails under plans to overhaul Britain's banking sector, the Government has announced.

But there are fears the reforms will make it even harder for banks to lend to recession-hit households and businesses.

The Government estimates that the plans will cost the banking industry up to £7 billion a year and the wider economy as much as £1.4 billion a year.

Chancellor George Osborne's long-awaited banking White Paper aims to make banks safer for savers by ranking individual depositors above bondholders and corporate creditors when it comes to recovering cash owed after a bank failure.

The reforms will also create a ring-fence around the high street banks which handle consumer and small business accounts to insulate them from the risks run by "casino" operations within the same group.

But moves to broaden the range of activities allowed in ring-fenced operations led to accusations from Shadow Chancellor Ed Balls that Mr Osborne was "watering down" reforms.

There are also mounting concerns over the knock-on cost of the reforms. The Treasury estimates the White Paper changes will cost UK banks an initial outlay of £2.5 billion, followed by between £4 billion and £7 billion a year.

The plans are also expected to lead to a reduction in UK economic output of £600 million to £1.4 billion, according to the Government. But it believes these costs will be far outweighed by the benefit of avoiding another financial crisis and mammoth bank bail-out, which has cost the UK £140 billion.

Mark Hoban, Financial Secretary to the Treasury, said the plans were "ambitious in scale but balanced in impact". In a statement to Parliament, he said the Government was "determined to take action to deliver a stable banking sector that underpins, not undermines, economic growth".

He added reforms should ensure that "investors reap rewards when banks do well but take the pain when banks fail". "Investors and creditors, not taxpayers, should bear the costs," he said.