A still image taken from video shows Bank of England governor Mervyn King presenting the Financial Stability Report in London December 1, 2011. Coordinated central bank action to provide cheaper dollar funding for starved European banks is a step forward but only provides temporary relief, King said on Thursday.

Bank of England governor Mervyn King. Photo: Reuters

BANK of England governor Sir Mervyn King has attacked Britain's banks for bringing the country to the brink of ruin and demanded urgent reform.

Sir Mervyn blamed the banks for the recession and said an overhaul of the financial system, including the separation of retail banking from ''risky investment banking'', was essential.

The comments will pile pressure on Chancellor George Osborne not to cave in to the banking lobby and to press ahead with planned legislation to ring-fence retail banking by 2015.

''We don't build nuclear power stations in densely populated areas, nor should we allow essential banking services and risky investment banking activities to be carried out in the same 'too important to fail' bank,'' Sir Mervyn said. ''It is vital that Parliament legislates to enact these proposals sooner rather than later.''

He pledged to crack down on the ''vested interests [who] rise up to defend their bonuses and profits''. Sir Mervyn underlined the scale of the financial crisis by saying almost all Britain's banks would have failed had not taxpayer support been extended to the entire system at the end of 2008. ''Our banking and financial system over-extended itself. The realisation of the true state of the banking system led to a deep global recession. Unemployment in Britain rose by over a million … I can understand why so many people are angry.''

The governor delivered his comments in the second BBC Today Programme Lecture.

Sir Mervyn also made a rare admission of failings at the Bank of England. ''Why did the bank not do more to prevent the disaster? We should have,'' he said.

However, he said the bank was hamstrung by the decision to move regulation to the Financial Services Authority (FSA) in 1997, a reform ''that would return to haunt us''. It left the bank with the limited power of ''publishing reports and preaching sermons''.

Regulation is now being moved back to the bank.

In a veiled attack on the Labour Party and the FSA, he also revealed he had pushed for a major recapitalisation of the industry in early 2008 but been rejected because ''it wasn't a popular message''.

''From the beginning of 2008, we at the bank began to argue that UK banks needed extra capital - a lot of extra capital, possibly £100 billion or more,'' he said.

A bailout was orchestrated in October 2008, and a second one in early 2009. Ultimately the banks raised a similar amount, with taxpayers injecting almost £70 billion into Royal Bank of Scotland, Lloyds Banking Group and Northern Rock.

''That bold action in October 2008 could have happened sooner,'' Sir Mervyn said.

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