Labour's Miliband calls for two new British banks

Ed Miliband, the leader of Britain's opposition Labour Party, arrives to give evidence to the Leveson Inquiry at the Royal Courts of Justice in central London, June11, 2012.

LONDON (Reuters) - Britain's opposition leader will on Monday call for the country's big five banks to be forced to sell hundreds of branches to create at least two major competitors by 2015.

The proposal comes as Britain's politicians argue over how best to respond to an interest rate rigging scandal that reignited public anger towards banks which many people blame for sinking the economy into recession.

"Let's break the dominance of the big five banks. Let's turn five into at least seven so there is proper choice for the consumer," Miliband is expected to say on Monday, according to text of his speech released in advance.

"The quickest way to do that is to force existing banks to sell off hundreds more branches to create the space needed for a challenger to thrive."

For years, Britain's banking system has been dominated by a handful of large lenders but many individuals and small companies say they are unable to access credit.

New entrants have already begun to emerge in the wake of the 2008 financial crisis, looking to fill the gap as the big banks focus on shrinking their balance sheets and building up capital reserves to meet new regulations

Although a fraction of the size of the top banks, challengers such as Metro Bank, Virgin Money and Aldermore have emerged while the planned sale of over 600 branches by Lloyds to the Co-operative Group will create a competitor with 7 percent of the total market for current accounts in Britain.

Despite that, Miliband is expected to demand support for a probe into competition in banking to be brought forward to 2013. Britain's retail banking industry is dominated by Lloyds, RBS (RBS.L), Barclays (BARC.L), HSBC (HSBA.L) and Santander (SAN.MC).

He will also promote support for customer-owned financial services firms. Britain said on Friday it was prepared to relax lending and funding requirements to make it easier for building societies to lend to small businesses.

"The revelations of the last two weeks have shown precisely what has gone wrong with our economy in the last decades. And the test of whether we can change things now starts with our banks," Miliband will say.

The Conservative-led coalition government plans to flood Britain's banking system with more than 100 billion pounds of cheap funding as it seeks to pump credit through an economy struggling to escape recession amid the euro zone crisis.

Miliband will say it needs to go further and create a 'British Investment Bank' to provide loans for small companies and infrastructure and offer the credit which banks are failing to do.

"Our banking system is letting down our small businesses. Every other major country understands that government needs to act to tackle this. It's time that British business stopped having to compete with one hand tied behind its back," he will say.

Miliband will also propose that a specialist banking crime unit be set up within the state Serious Fraud Office with the remit of investigating serious financial services fraud such as the rigging of the London Interbank Offered Rate (Libor). (Editing by Robin Pomeroy)