The City watchdog has consigned "soft-touch" banking regulation to the history books as it set out plans for a more intrusive approach.
Financial Services Authority (FSA) chairman Lord Turner said its new regime would impose tougher capital and liquidity requirements on banks to make them "a shock absorber in the economy, not a shock amplifier".
He raised the prospect of regulating individual mortgages and is considering rules to make firms link salaries and bonuses to risk management - reining in a culture of excessive City pay.
It stops short of a cap on bonuses or pay, but says banks must "ensure that their remuneration policies are consistent with effective risk management". This could become a rule for firms deemed vital to the stability of the financial system.
Lord Turner said the FSA had previously concentrated on individual institutions instead of assessing risks to the financial system as a whole.
He said vital analysis of the potential threat of financial sector trends to wider economic stability "fell between two stools" as neither the FSA nor the Bank of England was focused on the issue. He added that "regulators across the world took their eye off the ball" on monitoring banks' liquidity, or cash flow. When the crisis erupted, many were left with "toxic" assets they were unable to sell.
He added: "The banking system of the future should operate with more and higher quality capital, reducing its vulnerability to shocks."
Banks should have "capital buffers built up in good times to be drawn on in economic downturns", the chairman said.
He admitted liquidity and capital proposals would dampen the sector's "unsustainable" recent growth but played down fears banks would shun London as a result.
He said the City would "continue to be an important area for financial services", but the CBI business group viewed the proposals with caution, saying they could be a "blow to the UK's competitiveness".
