Senior bankers will face up to seven years in jail if they are found to have committed a new offence of reckless misconduct being proposed by the government as part of a series of measures to clean up the City in the wake of the 2008 banking crisis.
The reckless misconduct charge was one of the main recommendations of the high-profile parliamentary report into banking commissioned by the government in the wake of the Libor rigging scandal.
It is listed as one of the 86 amendments tabled by the Treasury to the banking reform bill which is also being used to implement many of the ideas of the independent commission on Banking, chaired by Sir John Vickers, to ringfence high street banks from their riskier investment banking activities.
The government stipulates that only individuals who are deemed to be senior managers would face reckless misconduct charges and they must be aware their decisions could cause the bank to fail. Lawyers have questioned whether it will be possible to bring the charge in practice.
The government tabled the amendments as other steps were taken by the Bank of England to strengthen the banking sector. It is to conduct annual stress tests of the major institutions and is likely to publish the results each year.
Paul Tucker, deputy governor of the Bank of England, said the new stress testing regime should "underpin confidence in the banking system".
The Bank – which could force banks to hold more capital than international standards and will devise the terms of the stress tests each year – indicated that the tests could expand beyond the top eight firms to smaller banks and also the clearing houses – known as central counterparties – which stand between major financial firms during complex trading.
But the Bank faced criticism after admitting its financial policy committee, which meets quarterly to look for risks to financial stability, had deliberately withheld information in November last year about the amount of extra capital it believed major banks needed to reach.
Paragraphs omitted from the minutes of the FPC's November 2012 meeting were published on Tuesday showing that the committee had agreed "it would be contrary to the public interest" to reveal its broad estimates of the shortfalls in bank capital it believed existed at the time.
In March this year the FPC said banks had a £25bn capital shortfall and by July Barclays embarked on a £6bn cash call – due to close this week. The bailed out Royal Bank of Scotland and Lloyds Banking Group have been selling off assets to raise capital.
Melanie Bowler, economist at Moody's Analytics, criticised the FPC, saying that withholding information "raises questions about the committee's credibility".
The newly released paragraphs show that members of the committee were concerned that "confidence in UK banks – and hence financial stability – could be adversely affected" if ways to solve the shortfalls were not published at the same time. No individual banks are identified but descriptions given of the banks indicate they were talking about Barclays, RBS and Lloyds.
The omitted text was released alongside the record of latest FPC meeting in September when it dismissed fears of a house price bubble caused by the government's Help to Buy policies but called on banks to devise clearer strategies for dealing with potential cyber-attacks.
The banking reform bill being used to bring in wide-ranging legislative changes is not expected to receive royal assent until next year.
The government used its amendments to address the concerns of Andrew Tyrie, the conservative MP who chaired the cross-party parliamentary commission on banking standards and had criticised the government for watering down attempts to "electrify" the ringfence between high street and investment banks.
The government will now be able to force banks to split up. "Banks will game the rules unless discouraged from doing so. The revised amendments enable the regulator to split a bank which tries. That creates a strong deterrent against gaming the ringfence," said Tyrie.
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."
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