Five years after the world’s financial system began melting down, consumers, homeowners and taxpayers -- that is, pretty much anyone who isn’t a bank executive -- remain frustrated that no banking bigwigs went to jail.

The reasons are many: Specific misdeeds couldn’t be pinned on higher-ups; prosecutors got cold feet after early fraud cases resulted in acquittals; what the person on the street considered “fraud,” such as giving triple-A ratings to bonds full of shoddy mortgages, was often legal.

The popular desire to put those in charge behind bars is understandable and unlikely to abate, given last week’s arrest of a former Citigroup Inc. and UBS AG trader accused of manipulating interest-rate benchmarks. At the same time, prosecutors are required to prove willful intent, beyond a reasonable doubt, to violate specific laws. Almost wrecking the world economy is a very bad thing. But it is not in and of itself illegal.

So what can be done when bankers, knowing they can’t be punished for what they don’t see, purposely don blindfolds? Or when banks are caught breaking the rules but are allowed to pay large fines (which punishes shareholders, not executives) to settle civil fraud cases without admitting or denying guilt?

Those are the questions the U.K.’s Parliamentary Commission on Banking Standards and the U.S. Securities and Exchange Commission sought to answer last week. Their answers flow from different legal, political and cultural conventions, yet they arrive at the same correct conclusion: When banks behave badly, someone must be held accountable. A personal price must be paid for institutional misconduct.

No Responsibility

The forensic analysis by the U.K. commission of what ails the banking industry is a tour de force, and its conclusions and recommendations are well worth reading. One of the most dismal features that emerged from the evidence, the report states, was the absence of any personal responsibility for widespread failings and abuses. “Ignorance was offered as the main excuse,” the report states. “It was not always accidental.”

Banking is not the only industry with such failings, of course. But its failings have a disproportionate impact on the world economy. And the lack of clear lines of responsibility allows bank executives to claim the “Murder on the Orient Express” defense: Everyone was party to the decision, so no one can be held to blame. This was the case in the Royal Bank of Scotland’s implosion and, in the U.S., the collapse of the mortgage market.

To prevent such behavior, the commission would require banks to assign crucial responsibilities to a specific individual. Someone would be clearly identified as responsible, for, say, how Libor rates are set or managing home foreclosures. So if an enforcement action is brought against a bank, regulators would know which senior people should be held responsible.

The commission also proposes a couple of novel ideas to help regulators enforce the law. First, it would shift the burden of proof in some cases so that bankers would have to show they took positive steps to prevent wrongdoing. It also recommends a new crime of “reckless misconduct in the management of a bank.” Bankers wouldn’t have to prove they weren’t reckless. But prosecutors could build a criminal case if executives showed a pattern of willful blindness to misdeeds, for example, or e-mails showed they took steps to cordon themselves off from knowledge of unsavory activities.

The legal community’s immediate response: It’ll never work. How would you prove, for instance, that a man who received a knighthood for his achievements in banking was also behaving in a criminally reckless manner? (The question isn’t hypothetical, as defenders of Frederick Goodwin, who presided over the Royal Bank of Scotland’s collapse in 2008, might argue.)

Prison Prospects

One answer: Don’t be so quick to knight bankers who engage in dizzying expansions with huge amounts of borrowed money and minuscule amounts of capital. Better, perhaps, to have bankers who worry about the prospect of a prison sentence for failing to know what’s happening in their own institutions.

There is a corollary. If a bank can settle a securities violation by paying a fine and without admitting to wrongdoing, it will commit the same violation over and over. This has been true through decades of SEC cases. Now Mary Jo White, the new chairman, is signaling that she will approve fewer of these kinds of settlements.

She’s right, even if the change slows down the enforcement process and increases litigation costs. It would also make settlements more meaningful. In 2011, U.S. District Judge Jed Rakoff embarrassed the agency, and rightfully so, when he refused to sign off on a settlement with Citigroup over the bank’s sale of risky mortgage bonds on which investors lost more than $600 million.

White would dial back the policy only slightly by requiring admissions of guilt when misconduct was egregious, for example, or when a large number of investors were harmed. She knows defendants won’t admit wrongdoing in cases that might open the door to shareholder suits, whose success rate would skyrocket with a guilty admission. As a result, the SEC may find itself litigating more often, with all the risks that entails. So the agency will have to choose its targets carefully.

The changes the U.K. commission and the SEC propose are not without controversy. But bankers with blindfolds and no-admit, no-deny settlements invite misconduct and allow everyone to escape responsibility. The benefits -- fewer global financial crises, less severe recessions, lower unemployment -- vastly outweigh the risks.

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