The Treasury will have the power from next year to take charge in any future banking crisis, including being able to tell the Bank of England (BoE) to pump money into the financial system.
Chancellor George Osborne published a draft law on Friday reforming the way Britain's financial system is regulated and setting out who has ultimate authority in a crisis.
The legislation is an attempt to draw a line under the regulatory failings that forced taxpayers to stump up hundreds of billions of pounds to shore up the banking sector in 2008.
It will scrap the Financial Services Authority from 2013 and hand power to supervise banks and insurers to the central bank.
When taxpayers' money is at risk in a crisis this legislation gives the Chancellor (of the Exchequer) the power to direct the Bank of England to act, Osborne said in a speech to world political and financial leaders in Davos, Switzerland.
He said the Chancellor would direct specific funding help for individual entities, the system for winding up ailing banks as well as intervention to preserve stability as long as the government is willing to take responsibility for the action and take the resulting risk on its balance sheet.
There will be no ambiguity about who is in charge, Osborne said.
A failure of the 15-year-old tripartite system of financial regulation at the time of the 2008 financial crisis was a lack of clear lines of responsibility between the BoE, the FSA and the Treasury, which shared the role.
The tripartite committee did not meet for almost a decade and allowed the now majority state-owned Royal Bank of Scotland to take over Dutch bank ABN Amro when credit markets had already frozen up, Osborne said.
The finance ministry will have the power to direct the BoE only if the direction is necessary to resolve or reduce a serious threat to the stability of the financial system of the United Kingdom, according to the Financial Services Bill.
Alistair Darling, finance minister during the 2008 crisis, said in his memoirs last year he had been frustrated at not being able to order Bank to do what he felt was right.
The Bank was independent and the Governor knew it. We did not agree on what to do, Darling wrote.
The British Bankers' Association, which represents lenders like Barclays, HSBC, Lloyds, and RBS, said it believes it is vital to bring the Chancellor into crisis management decisions at an early stage - and sooner than the current proposals suggest.
The FSA had no comment on the bill.
The bill also said a future BoE governor should serve only a single eight-year term rather than the current renewable five-year term. Mervyn King's term is due to expire in mid-2013.
The bill confirmed that the Financial Services Authority would be scrapped next year and replaced by two separate bodies to end the pre-crisis regulatory tick box culture.
One body, the Financial Conduct Authority (FCA), will police markets and have power to regulate consumer credit, currently handled by the Office of Fair Trading.
The bill stops short of giving the FCA competition powers, which it had sought, but strengthens its remit to ensure there is enough competition in markets.
The FCA will have powers to be more intrusive in its supervisory approach and be able to ban harmful financial products, a reform which follows two decades of mis-selling scandals that cost the industry 15 billion pounds in compensation.
A second body, the Prudential Regulatory Authority, will be a subsidiary of Bank and will concentrate on day-to-day supervision of banks, making Bank one of the world's most powerful central banks, and raising concerns about its accountability.
The Bank's Governor also chairs the Financial Policy Committee (FPC) established a year ago on an interim basis, to identify risks to financial stability in the UK and direct regulators to take action.
To counter worries about a lack of accountability, the Bank of England's supervisory body, the Court of Bank, proposed setting up an oversight committee for financial stability, made up of its non-executive members, to scrutinise Bank's policymaking committees.
The Court suggested that the oversight committee should commission reviews of the process and implementation of policymaking from external authorities like the International Monetary Fund.
In addition, the legislation will oblige the oversight committee to commission internal reviews of financial stability policymaking, not only from the FPC but from other parts of the Bank with responsibilities relevant to financial stability.
(Editing by Helen Massy-Beresford and David Cowell)