In an interview with the Observer, the Labour leader says he will confront the City of London with what is seen as the nuclear option for reform if the banks fail to separate their "casino" investment operations from services to account-holders, savers and businesses.
In terms that will incense the investment banking industry, Miliband says a Labour government, as one of its first acts, would push through a modern-day equivalent of the 1933 Glass-Steagall Act, which split the commercial and investment operations of US banks after the 1929 stock market crash.
The move is part of an attempt by Miliband to flesh out his promise to deliver a more "responsible capitalism" – amid signs that the public does not yet believe he is tough enough, nor has a sufficiently clear vision, to be prime minister.
Speaking ahead of Labour's annual conference, opening in Manchester on Sunday, Miliband says banks must concentrate on core functions such as lending to small businesses "rather than playing the international money markets". Such behaviour puts ordinary customers at risk of having to share the consequences of failed investments.
Echoing concerns expressed last month by Sir Mervyn King, governor of the Bank of England, who believes that reforms proposed last year by Sir John Vickers are being "watered down" after lobbying by the banks, Miliband said it was time to stop backsliding and change banking culture for good. The recent Libor scandal involving the fiddling of inter-bank interest rates and the £10bn scandal over mis-selling of payment protection insurance showed the culture was still rotten.
Miliband said: "Either they can do it themselves – which frankly is not what has happened over the past year – or the next Labour government will, by law, break up retail and investment banks.
"The banks and the government can change direction and say they are going to implement the spirit and principle of Vickers to the full. That means the hard ringfence between retail and investment banking. We need real separation, real culture change. Or we will legislate."
The coalition government says it will implement the majority of the Vickers report, which will be the subject of legislation due to reach the statute book by 2015. But the changes will not come into effect until 2019. The plans have, however, been watered down, with ministers agreeing that the ringfence will only apply to the UK operations of banks – even though many in the UK have vast overseas operations.
Vickers also wanted the government to insist that banks hold higher grade assets in their reserves to insure against another financial collapse. But the government relented after the industry complained that buying these assets would be expensive and the £1.3bn estimated cost would be passed to customers.
Miliband called on Saturday for the "rebuilding of Britain" and for 16-year-olds to be given the vote. Speaking to the Observer, he said: "It is incredibly important to show that we 'get it' on spending. We are very serious about understanding that the next Labour government is going to face difficult economic times."
But fiscal discipline had to be balanced with an appreciation that borrowing was rising faster because the government had cut too deep and fast. "If you don't have a growing economy, businesses aren't paying taxes, people are claiming benefits and it is not working. So it is a two-pronged approach."
Labour is a solid 10 points ahead of the Conservatives, according to the latest Opinium/Observer poll. Labour is on 39% (down 3% on a week ago) and the Tories are on 29% (down 1%).The Liberal Democrats are up 2% on 10%, the same as Ukip.
However, Miliband's personal ratings, particularly against David Cameron, remain poor, as does the party's reputation for economic competence. Depressingly for Labour, 29% say the coalition government is responsible for the state of the economy, against 46% who blame the last Labour government.
Jon Cruddas, who heads Labour's policy review, tells BBC's Sunday Politics London that Labour could retain the coalition's limit on immigration. Asked whether Labour could stick to the 21,700 cap on non-EU immigrants, he said: "We're looking at it, obviously. It's part of our review of the whole area. We haven't got a specific position on it, in terms of the level at the moment, but it's something that we're monitoring."
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