In its formal response to the PCBS report, the Government also said that it would introduce a new two-tier authorisation process for bank staff and take tougher action to ensure bankers' pay was aligned with performance.
Any necessary legislative changes would be introduced as amendments to the Banking Reform Bill, which is currently before Parliament, it said.
"Last summer I called for a thorough and intensive investigation into how to improve standards in the banking system and the PCBS has delivered," said George Osborne, Chancellor of the Exchequer. "I am pleased to say that the government will implement its main recommendations."
"Cultural reform in the banking sector marks the next step in the government's plan to move the whole sector from rescue to recovery and ensure that UK banks demonstrate the highest standards, and are able to support business and drive economic growth," he said.
The PCBS, led by Treasury Select Committee chair Andrew Tyrie, was set up in July 2012 after allegations of misconduct in relation to LIBOR and other benchmark interest rates emerged against domestic and international banks. In its final report, published last month, it made a series of recommendations for reform of the professional culture and standards of the UK banking industry.
Under its proposals, a new criminal offence of 'reckless misconduct in the management of a bank' would be created and would apply to senior individuals. This offence could carry a prison sentence and, following a conviction, any pay or bonuses received by that individual during the period of reckless behaviour should be recoverable through separate civil proceedings.
The Government has endorsed replacing the existing Approved Persons regime, under which those who perform certain controlled functions within a bank must be approved by the financial regulators, with a two-tier Senior Persons Regime and Licensing Regime, underpinned by a new set of Banking Standards Rules. The Senior Persons Regime would ensure that the main responsibilities within banks are assigned to specific individuals, who would be held accountable for any breaches, while the Licensing Regime would apply to other bank staff whose actions or behaviour could "seriously harm" the bank, its reputation or its customers.
New standards of governance, to be drawn up by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), would ensure that firms have the correct systems in place to identify risks and maintain standards on ethics and culture. The Government has also pledged to better align bankers' pay with performance, which could allow for bonuses to be deferred for up to ten years or 'clawed back' if a bank needs to be bailed out by the taxpayer. However, it will limit these proposals to Senior Persons and other 'material risk takers', rather than applying them as widely as the PCBS recommended.
"The Government recognises that other regulated staff can also affect the reputation and customers of a bank, as suggested by the Commission, and that poorly designed remuneration packages may contribute to that," it said in its response. "Alongside legislation to introduce the new banking standards regime, the Government will also ask the regulators to consider the case for extending high-level principles on remuneration to all UK regulated staff."
It added that the FCA was already reviewing the impact of sales-based incentives on retail staff "in order to address potential misalignment of incentives for the appropriate category of regulated staff".
The Government also rejected a proposal by the PCBS to disband UK Financial Investments (UKFI), the arms-length body which manages taxpayer shareholdings in Lloyds and RBS. As announced by the Chancellor in his Mansion House speech at the end of June, the Government is investigating the case for splitting RBS into a state-owned 'bad' bank and a retail bank, which could be returned to the private sector. It is also "actively considering options" for selling the public's 39% stake in Lloyds, although it has not adopted a formal timetable for doing so.
The announcements form part of the third strand of plans to reform the banking sector, set out by the Chancellor earlier this year, Osborne said. Changes to the regulatory regime, introduced in April, gave the Bank of England regulatory oversight of the banking system, while structural reforms to banks themselves are set out in the Banking Reform Bill. Further plans to increase choice and competition in the banking sector are also underway, the Government said.