Chancellor Alistair Darling has confirmed that parts of Lloyds and RBS will be broken up and sold off, which means there could be three new banks in the next three to four years.
He adds assets will only be sold to new entrants to the UK banking market in order to increase competition and choice in the sector.
This could pave the way for non-bank brands with ambitions to grow in the sector, such as Tesco and Virgin, to bid for the assets. It could also result in the parts being sold off to foreign financial services firms.
The new banks will be retail banks, offering savings and home loans.
The move follows concern from European competition commissioner Neelie Kroes, who has reportedly asked that Lloyds and RBS sell some operations in the wake of their part nationalisation.
The Government has a 70% stake in RBS and a 43% stake in Lloyds.
It is understood that RBS is preparing to sell its Churchill and Direct Line insurance businesses and some branches in Scotland, while Lloyds is reportedly readying the sale of Cheltenham & Gloucester and online arm Intelligent Finance.
The Government also confirmed it would be splitting up Northern Rock into two parts by the end of the year and could sell off one part within the next four years.