Senior bankers guilty of reckless misconduct in the management of a bank should be jailed, the Banking Commission has concluded in its final report.
It was one of a serious of recommendations made by the cross-party commission.
Chancellor George Osborne welcomed the report's proposals, calling it "very impressive work".
ITV News' Business Editor Laura Kuenssberg reports.
The City of London Corporation welcomed the Parliamentary Commission on Banking Standards report, saying it has put forward "some sensible suggestions" on incentives, improved accountability and increased competition.
Policy chairman Mark Boleat said: “It is important, however, to note that much work has already been done in this area and the impact of past reforms should be properly assessed before more changes are introduced.
"What the banking sector needs is clarity and certainty from policymakers over the future shape it will be required to take in coming years.
"The City Corporation stands ready to help facilitate dialogue to explore how to implement these recommendations”.
Reckless bankers should be jailed, a long-awaited report on banking commissioned by the government has recommended.
David Fishwick, who starred in documentary series Bank of Dave, has told Daybreak that "we wouldn't need this bonus culture [if we had a community bank in each town and city]. "
He added: "People who rob banks go to prison but banks that rob people get paid bonuses and that really has to stop. We need to go back to community banking."
The Banking Commission has recommended a new pay code that could see bonuses deferred for 10 years and powers to cancel outstanding financial awards in the case of a taxpayer bailout.
However, the commission called a bonus cap "crude" and unworkable.
Chairman Andrew Tyrie said: "Recent scandals, not least the fixing of the Libor rate that prompted Parliament to establish this Commission, have exposed shocking and widespread malpractice.
"Taxpayers and customers have lost out. The economy has suffered. The reputation of the financial sector has been gravely damaged. Trust in banking has fallen to a new low".
Chancellor George Osborne has welcomed the Banking Commission's report, calling it "very impressive work".
He wrote on Twitter:
Labour MP John Mann, who sits on the influential Treasury Select Committee, said the Banking Commission's report does not go far enough:
The shadow chancellor Ed Balls has said that proposals to jail reckless bankers "is the way forward."
Mr Balls added: "The challenge now is to make sure we don't have a repeat of these issues in the future. The Government needs to act now."
Radical plans to split Royal Bank of Scotland (RBS) into a "good" bank and a "bad" bank must be looked at immediately as part of an urgent rethink of Government plans for privatisation, according to an influential Parliamentary commission.
In its keenly-awaited final report, the Commission on Banking Standards stopped short of recommending a full break-up of RBS, but said the option must be considered as it warned current plans to return RBS to the private sector risked being "insufficient".
The Government also came under heavy fire for "political interference" in RBS and fellow state-backed lender Lloyds Banking Group, with the report calling for the body in charge of managing the taxpayer stakes to be scrapped.
A Treasury spokesman said the report was a "very impressive piece of work".
He said the Government will support legislation where it is needed, and will amend the Banking Bill currently before Parliament to ensure changes are quickly enacted.