* Labour leader promises to cap banks' market share
* Miliband seeking boost to 2015 election campaign
* Government and industry criticise Labour plan
By William James
LONDON, Jan 16 Britain's banks will have to shrink and sell off branches in order to improve competition if Labour wins the next election, party leader Ed Miliband will announce on Friday in a speech spelling out his agenda for financial reform.
Miliband will pledge to break up the financial sector by imposing a cap on the market share of personal banking and small business lending that any single institution can have.
"To really change our banking system, we have to get to the root of the decades-long problem in British banking: too much power concentrated in too few hands," Miliband will say according to extracts of his speech released in advance.
"We are not asking whether existing banks might have to divest themselves of significant number of branches. We are asking how we make that happen."
Leading in the opinion polls ahead of a May 2015 election, Miliband is looking to find fresh momentum for his party's campaign which has so far centred on blaming the Conservative-led government for falling living standards.
He will argue that improving banking sector competition will help small businesses to grow, creating higher-paying jobs and raising living standards.
Details of the plan leaked earlier this week drew a critical response from both the government and the chairman of Royal Bank of Scotland - one of Britain's biggest banks which is likely to find itself in Miliband's sights.
RBS chairman Philip Hampton said any forced branch selloff would be "incredibly expensive". Mark Carney, the governor of the Bank of England said that breaking up a bank did not always create more competition.
The details of the market share cap will be determined by a competition watchdog review. That could see the first branches sold off within a year if Labour win power and full divestment completed by 2020.
The government criticised the concept of a market share cap and highlighted its own policies designed to encourage greater competition in the sector. It argued that Labour could not be trusted to reform the banks, having overseen a period of deregulation that exacerbated the financial crisis of 2008.
A surprisingly strong economic recovery, jobs growth and below-forecast inflation have blunted Labour's criticism of Prime Minister David Cameron's Conservatives, who remain more trusted to manage the economy according to opinion polls.
Taking further heat out of Miliband's "cost of living" criticism, Conservative finance minister George Osborne announced his backing late on Thursday for an above-inflation increase in the minimum wage. '
The limit on market share forms the main plank of a speech designed to reinvigorate Labour's campaign by extracting political capital out of Britons' mistrust of bankers. It follows a call earlier this week by Labour for the government to step in and curb bonuses at the largely state-owned RBS.
Miliband will draw parallels between his promise of action against the banks and his pledge made in September last year to freeze prices at Britain's big-six energy firms.
"Today, I want to talk about another broken market: Britain's banking system," he will say. "There can be no bigger test of whether we are serious about building a new economy and tackling the cost-of-living crisis than reforming Britain's banks."
The pledge to freeze energy prices wiped billions off the shares prices of the industry's biggest firms and set the political agenda for the following months, despite attempts by Cameron to dismiss the idea as a gimmick.