The UK's big banks will be separated if they fail to follow new rules to ring-fence risky investment operations from High Street outlets, Chancellor George Osborne has announced.
Watch live: Chancellor George Osborne giving his speech on banks
He has said taxpayers are angry at banks' behaviour and will never again be expected to bail them out.
His speech comes on the same day the government introduces its Banking Reform Bill in Parliament.
Customers will also be able to switch bank accounts to a rival within a week.
Mr Osborne had previously warned against "unpicking the consensus" over structural reform of the sector.
But the chancellor appears now to have accepted a major recommendation of last year's Parliamentary Commission on Banking Standards which called for a reserve power to "electrify the ring-fence" if banks did not implement reforms.
The Independent Commission on Banking, led by Sir John Vickers in 2011, had concluded that ring-fencing was the best way to protect "core" retail banking activities from any future investment banking losses.
Mr Osborne said in his speech, at JP Morgan's administration offices in Bournemouth, that banks had failed to take responsibility for their actions and people were still angry, five years after the financial crisis.
He referred to greed and corruption over banks' fixing of the Libor interest rate, but said that staying angry about bankers' behaviour would not fix the system.
Recklessness by banks' so-called "casino operations" was blamed for dragging the financial system to the brink of collapse. The reputation of banks has been further undermined by scandals such as the mis-selling of payment protection insurance and the rigging of the Libor interest rate.
Under the reforms, investment and High Street banks will also have different chief executives.
Less money
"When the [financial] crisis hit, the fire was then so great that the whole economy was sacrificed to put it out," Mr Osborne said. "The British people need to know that lessons have been learnt. And they have."
He said his predecessor Alastair Darling felt he had no option but to bail Royal Bank of Scotland out.
"Not just RBS on the High Street, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai.
"I want to make sure that the next time a chancellor faces that decision they have a choice. To keep the bank branches going, the cash machines operating, while letting the investment arm fail."
Shadow Treasury minister Chris Leslie said: "If the chancellor is now being dragged towards a partial climb down, this is a step in the right direction.
"We must see fundamental cultural change in our banks. If this does not happen then banks will need to be split up completely, as we made clear in the autumn."
But Anthony Browne, chief executive of the British Bankers' Association, said the legislation would create "uncertainty for investors, making it more difficult for banks to raise capital, which will ultimately mean that banks will have less money to lend to businesses".
He said it would damage London's attractiveness as a global financial centre.
Mr Osborne's speech comes at the start of a year of change for the UK financial regulation.
The Financial Services Authority is being replaced by two bodies. The Prudential Regulation Authority, part of the Bank of England, will regulate financial firms, and the Financial Conduct Authority (FCA) will oversee consumer protection.
And later this year Mark Carney will become the new governor of the Bank of England, replacing Sir Mervyn King.
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