In a speech to the Royal Society of Arts in London, Osborne claims that larger institutions may take risks where perhaps they wouldn’t have done prior to securing government backing.
Osborne says that size itself is a risk factor for financial services firms and may have a negative impact on competition.
He says: “Not only do large financial institutions do more damage when they get into trouble, but their very size and ‘too big to fail’ status may encourage them to behave irresponsibly and take risks that smaller banks dare not take.
“By dint of its substantial shareholdings the government has a powerful influence over the future structure of the UK banking industry whether it likes it or not.
“When the time comes to sell off those shareholdings we need to think very carefully before simply selling them to the highest bidder without thinking through the consequences for the wider economy.”
Osborne says there may be a case for smaller financial institutions to emerge, in order to prevent “a bitter irony” of banks posing a higher level of risk than before the financial crisis took hold.