Labour has demanded that top High Street banks should be forced to sell off hundreds of branches in a "root-and-branch" reform of the industry.

Shadow chancellor Ed Balls told the BBC the government was "foot-dragging" on the issue.

Labour is proposing that the sold-off branches should be used to create "challenger" banks, to increase lending and competition within the sector.

The government said it was already working to reform finance.

The coalition is committed to creating one challenger bank by the end of 2013, to compete with the "big five" of Barclays, Lloyds, HSBC, RBS and Santander.

But Labour believes there should be two challengers by 2015, meaning more than 1,000 branches would need to be sold off by the existing large banks to create seven sizeable lenders in the UK.

An investigation by US and UK regulators into the rigging of inter-bank lending rates has resulted in a record fine for Barclays, with the Serious Fraud Office confirming it has formally launched an investigation.

Mr Balls said this should result in criminal proceedings, telling BBC One's Andrew Marr Show: "The reason why people are so angry is they think when people avoid their taxes or cheat on benefits they get sentences in jail.

"But when bankers do massive multi-million or billion pound frauds, there aren't criminal prosecutions.

"And the government should have acted. And I think the Fraud Office has been very, very tardy on this."

On banking reform, he said: "The government and [Business Secretary] Vince Cable are foot-dragging on the floor."

The Mail on Sunday suggests that, in a speech on Monday, Labour leader Ed Miliband will say the "big five" of Barclays, HSBC, Lloyds, RBS and HBOS should divest of hundreds branches to enable the privately run challenger banks to emerge.

But Mr Vince Cable told the Andrew Marr Show the government was already acting to reform banking, adding: "I want to see more competition. It's a good idea and it's happening...

"We are creating a more competitive banking system."

He accused some of the existing banks of not providing enough lending to businesses but concentrating on "short-term trade profits and not focusing on the long term. It's throttling British industry".

The Barclays scandal has led to a political row between Labour and the coalition about how a subsequent inquiry should be handled.

Labour voted against the creation of a parliamentary committee to investigate the scandal after its bid to launch a judge-led inquiry was rejected by 320 votes to 239, a government majority of 81.

The Commons backed a parliamentary inquiry, carried out by a specially created committee of MPs and peers, by 330 votes to 226, a majority of 104.