Fred Goodwin, the former chief executive of the Royal Bank of Scotland, has been stripped of his knighthood by the Queen on the advice of the forfeiture committee.
It was awarded by the previous Labour government in 2004 for services to banking .
The London Gazette announced that he had brought the honours system into disrepute.
Goodwin has no right of appeal, and in accordance with custom was given no right to make representations to the forfeiture committee, a group of four permanent secretaries. The authority to rescind an honour rests with the Queen alone.
David Cameron said: "I welcome the forfeiture committee's decision on Fred Goodwin's knighthood. The FSA [Financial Services Authority] report into what went wrong at RBS made clear where the failures lay and who was responsible. The proper process has been followed and I think we've ended up with the right decision."
The chancellor, George Osborne, told Sky News: "I think we've got a special case here of the Royal Bank of Scotland symbolising everything that went wrong in the British economy over the last decade.
"Fred Goodwin was in charge and I think it's appropriate that he loses his knighthood."
Announcing the decision, the Cabinet Office said in a statement: "This decision not normally published in advance was taken on the advice of the forfeiture committee, which advised that Fred Goodwin had brought the honours system in to disrepute."
The timing of the announcement was intriguing. It came the day after Cameron struggled to explain why he had not demanded that the current chief executive of RBS, Stephen Hester, refuse to take his full bonus.
Both Cameron and Ed Miliband had called for Goodwin to lose his knighthood.
Thehe forfeiture committee said: "The scale and the severity of the impact of his actions as chief executive officer of RBS made this an exceptional case.
"In 2008 the government had to provide £20bn of new equity to recapitalise RBS and ensure its survival and prevent the collapse of confidence in the British banking system. Subsequent increases in government capital have brought the total necessary injection of taxpayers' money in RBS to £45.5bn.
"Both the Financial Services Authority and the Treasury select committee have investigated the reasons for this failure and its consequences.
"They are clear that the failure of RBS played an important role in the financial crisis of 2008-09, which together with macroeconomic factors triggered the worst recession in the UK since the second world war and imposed significant direct costs on British taxpayers and businesses. Fred Goodwin was the dominant decision maker at RBS at the time.
"In reaching this decision it was recognised that widespread concerns about Fred Goodwin's decision meant that the retention of a knighthood for services to banking could not be sustained."
The CBI said: "The business community will understand the Queen's decision to take away the knighthood awarded to Fred Goodwin for services to banking in 2004. Such an annulment is exceptional but unsurprising, given all of the circumstances."
Normally an honour is withdrawn if someone is guilty of a criminal offence, and it will be asked whether other knighted bankers should also see their honours withdrawn.
The forfeiture committee is chaired by Sir Bob Kerslake, the head of the civil service. The other members are Dame Helen Ghosh, the permanent secretary at the Home Office, Paul Jenkins, the Treasury solicitor, Sir Peter Housden, the permanent secretary of the Scottish government, and Sir Jeremy Heywood, the cabinet secretary.
Ed Miliband told Sky News he welcomed the move. But he added: "I think it's only the start of the change we need in our boardrooms. We need to change the bonus culture and we need real responsibility right across the board. I think that is what the public want, I think that is what government working with the private sector needs to deliver."
David Fleming, Unite's national officer, said: "It is a token gesture to strip Fred Goodwin of his knighthood, but one which will be well received by the thousands of workers who lost their jobs during his rule.
"Nonetheless this will do nothing to bring job security to the staff across the banking sector who continue to work under a culture of excess and greed at the top. Action from the government is needed in banking reform, not simply empty rhetoric on knighthoods or shareholder activism."
The former director general of the CBI and one-time Labour trade minister Lord Digby Jones said: "I think there is the faint whiff of the lynch mob on the village green about this, but that isn't to say that the end result isn't what is right."
The Conservative MP David Ruffley, a member of the Treasury select committee, told Sky News: "This was a reckless man. He was playing with other people's money … he wasn't very good at it. He proved a huge disservice to the banking industry and I think what people wanted to hear was that this man was held to account.
"Bizarrely there's been no criminal charges against the man, so he's not going to be in front of a jury and there was a sense that this guy had got away scot-free and the only thing left really to show the public opprobrium was for the knighthood to be stripped."
