The UK's big banks will be broken up if they fail to follow new rules to ring-fence risky investment operations from High Street outlets, Chancellor George Osborne has announced.
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 also said the banking system was not working for its customers, particularly small businesses and individuals.
He pointed to the fact that large banking transactions could be done instantly, whereas small businesses could wait days for money to pass through the system.
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.
The 2008 crisis, which marked the start of the credit crunch, saw the government use £65bn of public money propping up Royal Bank of Scotland and Lloyds Banking Group.
Mr Osborne also referred to greed and corruption over banks' rigging 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.
"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."
The chairman of the Parliamentary Commission on Banking Standards, Andrew Tyrie, said there was "much to do" but called the plans a step in the right direction.
He said his commission would examine the plans and report back.
But he warned the banks could not be trusted: "Banks require discouragement from gaming the rules. They will always try to do so unless strong disincentives are put in place."
He said once the spotlight had moved away from the banks, they would be likely to try to soften the regime: "At that time, banks could be particularly active in testing the ring-fence and lobbying politicians to alter its design for their benefit. Electrification creates incentives against such behaviour."
Mr Osborne also received backing from the chief executive of Lloyds Bank, Antonio Horta-Osorio, who broke ranks with the British Bankers' Association, which came out against the proposed "electrification" of the ring-fence.
Mr Horta-Osorio told Mr Tyrie's banking standards committee on Monday that: "If we think that for society as a whole it is important to have ring-fencing, both from a financial stability point of view and from a cultural point of view, I absolutely agree it should have strong enforcement and strong incentives in order for this to happen."
Shadow Treasury minister Chris Leslie said: "If the chancellor is now being dragged towards a partial climbdown, 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."
Anthony Browne, chief executive of the British Bankers' Association, acknowledged that banks had made "massive mistakes" and he accepted the need for reform.
But he said the Government's change of heart on the reserve power to "electrify the ring fence" was good politics but bad economics that would lead to even less lending.
"It's bad economics because it's yet another measure that makes it more difficult for banks to lend money to businesses, which is what the economy needs at this stage.
"And the government said just before Christmas that re-opening the whole banking reform debate in this way would create massive uncertainty in the industry and that's why it was opposed to it. It's now changed its mind."
He said that that created massive uncertainty and that would mean a weakening of the will to invest.
He said it would damage London's attractiveness as a global financial centre.
The Engineering Employers Federation (EEF) said the proposals did not do enough to help businesses, where the big four banks had an 85% share of bank accounts - even higher than the 75% share they have of personal bank accounts.
The EEF's chief economist Lee Hopley said: "A lack of choice within and beyond the High Street is an important supply-side factor holding back lending to business in the UK.
"But, government should be going further in addition to what was announced today, looking at the whole suite of actions that could be taken now to vigorously shake up the competitive landscape. These should include full account number portability."
Mr Osborne's speech comes at the start of a year of change for 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.