Senior bankers could get up to seven years in jail and an unlimited fine if convicted of the new offence of "reckless misconduct", the Treasury has announced.
The sanction will apply to bankers whose management "leads to the failure of a bank" and was originally proposed by an influential parliamentary banking commission that came together in the wake of the Libor-rigging scandal.
To be convicted, the individuals must be deemed to be senior managers and must be aware that their decisions could cause the bank to fail. The charge would not go as far as the rather extreme proposal unveiled by Tory MP Richard Fuller, who called for Labour ministers to be jailed for failing to regulate the banks.
The charge for banking misconduct was unveiled as one of the 86 amendments tabled by the Treasury for the banking reform bill, which is not expected to pass into law until next year. Other amendments include rules to allow the government to split up big banks.
Top 5 Notorious Rogue Traders
Jérôme Kerviel, £3.7bn(01 of05)
Open Image ModalIn early 2008, French bank Société Générale revealed colossal losses of £3.7bn, by a single trader.Dodgy trades by Kerviel racked up the vast amount of money lost in only three days, through a combination of illegal transactions.Kerviel was sentenced to three years in prison for forgery, unauthorised computer use and breach of trust. (credit:PA)
Peter Young, £220m(02 of05)
Open Image ModalYoung, by comparison to bigger fraudsters, didn't lose too much money - but it was the bizarre nature of his trial and the controversy surrounding it that made him infamous.He was judged unfit to stand trial after being diagnosed as a schizophrenic. Allegedly Young made a number of attempts to castrate himself and decided to live as a woman by the name of Beth.Young made a number of appearances at court dressed as Beth. (credit:PA)
Nick Leeson, £827m(03 of05)
Open Image ModalEnglish trader Nick Leeson brought down Barings bank in Singapore.Hiding bad trades in secret accounts, Leeson accumulated losses of £827m for the bank over a number of years after making ever more desperate attempts to reclaim the money.After trying to flee the country, Leeson served four years in Singapore for his actions. (credit:PA)
John Rusnak, £430m(04 of05)
Open Image ModalAn employee of the American bank Allfirst, Rusnak engineered a loss of over £400m, or $691m.In 2003, Rusnak was sentenced to 7 years in prison, a small portion of the 30 years he could have faced.Due to Rusnak's actions, the bank had to be sold on and 1,000 employees lost their jobs.Pictured: Group CE Michael Buckley announces to a press conference in 2002 the actions the bank was forced to take after Rusnak's losses (credit:PA)
Yasuo Hamanaka, £1.6bn(05 of05)
Open Image ModalJapanese copper magnate Hamanaka was jailed for eight years in 1998 for unauthorised trading.Hamanaka had been trading illegally for almost a decade. (credit:PA)
Lydia Prieg, researcher at the New Economics Foundation told the Huffington Post UK: "These penalties are treating the symptoms but not the cause of our banking problems.
“This isn’t a case of a few rotten apples: individual bankers are incentivised to take unnecessary risks by our dysfunctional banking system."
A Treasury spokesman said: "Today's amendments mark the final part of the government's plan for the biggest ever overhaul of the UK banking system."
"Already we have put the Bank of England back at the centre of prudential supervision and now, through the banking reform bill, we are delivering on our promise to increase competition, drive up standards and increase financial stability."