Bad bank chiefs face ousting or, at worst, seven years' in jail

Banks were yesterday told they face tough stress tests every year to ensure they can withstand a repeat of the financial crisis.

Meanwhile, draft laws were published that would send senior bankers to jail for up to seven years if their bank failed and they were found guilty of a new offence of "reckless misconduct". The laws had been recommended earlier in the year by a cross-party committee of MPs but were only included in a wide ranging set of proposed amendments to the Banking Reform Bill.

Under the Bank of England's new powers, bosses could be ejected from their posts if they fail to meet required standards on setting up adequate financial buffers.

Banks could also be required to hold more capital than international rivals. "At the very least, banks would need to maintain sufficient capital to be able to absorb losses in the stress scenario and not fall below internationally agreed minimum standards," the Bank of England said.

The tests are designed to be tough, and considerably tougher than those mandated by the EU. The Bank also made it clear that they will not be used to give mere "pass or fail" results.

Rather, the Bank, through its Financial Policy Committee and Prudential Regulation Authority (PRA), will be able to order banks to increase capital in specific areas and even demand management changes.

The Bank's Deputy Governor, Paul Tucker, said: "We believe that a stress-testing regime can enhance the quality of the Bank's macro and micro... supervision and, over time, underpin confidence in the banking system."

He also emphasised that it will help make the newly all-powerful Bank accountable to the public through Parliament. "To have such power with limited transparency would be uncomfortable," he said. Bankers last night claimed to be sanguine about the tests, but regulators have privately said that several big financial institutions had to be dragged "kicking and screaming" into boosting their capital strength when the PRA said there was a collective £25bn financial black hole in the UK industry's collective balance sheet earlier this year.