The Government will legislate to ensure reckless bank bosses can be jailed and bonuses can be clawed back, David Cameron has said.
The Prime Minister said he accepted key recommendations in a parliamentary report and promised to act on them.
The Parliamentary Commission on Banking Standards called on the Government to hold senior bankers personally responsible for malpractice and introduce a new criminal offence for reckless management that carries a custodial sentence.
Its long-awaited final report suggests regulators should be given the power to defer bonuses for 10 years under plans to stamp out excessive pay practices.
The wider reforms proposed include setting up a new professional code of conduct and licensing bankers.
Answering questions in the Commons, Mr Cameron was pressed on whether he supported the recommendations on bonuses and criminal penalties.
"Yes, I do support both of those measures," he said. "Obviously we need to take time to read this excellent report.
"But penalising, including criminal penalties against bankers who behave irresponsibly, I say yes. Also, making sure that banks who are in receipt of taxpayers' money that you can claw back... bonuses, I say yes too."
He said ministers would be using the Banking Bill currently going through parliament to implement the plans.
Labour leader Ed Miliband accused Mr Cameron of lining bankers' pockets by cutting the top rate of tax from 50p to 45p.
He said official statistics showed that bonuses were up nearly two-thirds year on year in April, when the reduction took effect.
"The reality is bonuses are up 64% in the City," he said. "And why? Because he has cut the top rate of tax from 50p to 45p - so people take their bonuses in April and get a massive tax cut as a result."
However, the Prime Minister insisted that bonuses were 85% lower in 2012-13 than they were in 2007-8. Labour had been in charge when the banking system got out of control, he said.
"They had 13 years to sort out this problem. They did absolutely nothing," Mr Cameron added.
Speaking before the exchanges, Andrew Tyrie, chairman of the commission, said scandals such as the fixing of the Libor rate had 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," he said.
He said regulatory failures were also responsible and called on the Government to "get on with the job" of implementing reforms.
The commission recommended setting up a licensing regime to "empower the regulator to judge those whose behaviour could seriously harm the bank, its reputation or its customers", against a new set of banking standards rules.
Mr Tyrie added: ""Personal accountability is little more than an illusion in many parts of banking, especially at senior levels.
"For too long, senior figures have appeared to be beyond enforcement."
On pay, the commission said a bonus cap was "crude" and unworkable, but recommended a new remuneration code and powers to cancel outstanding financial awards in the case of a taxpayer bailout.
The report also calls for a number of further inquiries, such as a study into the retail and small business banking sector and a report on reforms to improve customer choice, including current account switching.
Shadow chancellor Ed Balls welcomed the report as a "radical blueprint for change" in the banking sector.
He said: "Britain needs reformed banks to work for the economy, serve their customers and better support businesses for the long term.
"That's why the Government, Parliament and the banks must act without delay on the report's recommendations."
Anthony Browne, chief executive of the British Bankers' Association, hailed the report as the "most significant report into banking for a generation".
"We look forward to working with Government and regulators to take forward the constructive proposals contained in the report, learning the lessons of recent years in order to deliver a banking industry which is trusted, financially sound and serves the interests of its customers, shareholders and society," he said.
But some of the proposals met with a lukewarm reaction in the City.
Gary Greenwood, of Shore Capital Stockbrokers, called the recommendations "alarming".
He said: "We question whether the industry will be able to attract top talent, given the proposed restrictions on pay and risk of being sent to jail for getting the job wrong.
"We think the proposal to put financial safety ahead of shareholder interests suggests an industry that is unlikely to generate above average returns for its owners in the long run."