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The Chancellor, George Osborne, has used his annual Mansion House speech to the City to announce the government is preparing to sell its stake in Lloyds Bank back to private investors.

Mr Osborne said Lloyds - 39%-owned by the government - was in a good position and investor interest was growing.

On RBS, in which taxpayers have an 81% stake, he said he would look at whether to split the good bits from the bad.

His speech comes on the same day as a major report into the banking sector.

The chancellor also announced that the outgoing governor of the Bank of England, Sir Mervyn King, is to become Lord King.

The chancellor's speech echoes the findings made by the Banking Standards Commission earlier on Wednesday, which said that Lloyds was better placed to return to the private sector and that RBS could be split into two.

Lloyds is already planning to float 631 branches under the TSB brand at some point next year.

This is known as Project Verde, and follows the order to sell them by the European Commission.

A deal for the branches to be bought by the Co-op Bank fell through in April.

Reacting to Mr Osborne's speech, shadow chancellor, Ed Balls, said: "On Lloyds, we are clear that the taxpayer needs to get its money back but following the collapse of branch sales to the Co-op Bank it's vital that we have a new strategy from the government to boost competition on the high street."

Mr Osborne said that Lloyds shares were "trading at around the price where selling would reduce the national debt" and said he was actively considering options for sales of Lloyds shares.

He said he had no pre-fixed timescale or method of disposal.

The ´óÏó´«Ã½'s business editor, Robert Peston, said the chancellor had decided that the initial tranche would be sold to investment institutions rather than retail investors.

For the first block of government shares, an institutional placement is likely to be the most effective way of managing risk and getting value.

There had been speculation about an announcement on RBS since the bank's chief executive, Stephen Hester, announced his resignation last week.

Mr Hester has said the privatisation of RBS could take up to 10 years. However, it is thought the government may want to act more quickly.

Mr Osborne said at he Mansion House he did not want "a quick sale of our RBS shares".

He went on to say he would "only sell our stake in RBS when we feel the bank is fully able to support our economy and when we get good value for you, the taxpayer", but he said that moment was some way off for RBS which was weighed down by loans issued in the boom which had gone bad and might take a long time to improve.

The chancellor appeared to nod towards splitting the bank into its good and bad parts, saying that he thought that should have happened some time ago: "With hindsight, I think splitting RBS into a good bank and a bad bank was probably what should have happened in 2008."

Earlier on Wednesday, the Banking Standards Commission said the state of RBS, and its continued ownership by the government, "created serious problems for the UK economy".

It said it was time to look afresh at the timetable for returning RBS to the private sector.