Bank of England bosses said today that US President Barack Obama was right to shake up the banking system as part of his self-declared "fight" with Wall Street announced last week.
Bank Governor Mervyn King welcomed Mr Obama's move for putting "radical reform on the table" to overhaul the bank sector.
But Mr King warned against rushing into moves that could harm the economic recovery and said proposals to limit banking activities should be part of a wider structural change.
In a Commons hearing on the "too big to fail" debate, Mr King said: "What the proposals last week did was to make very clear that radical reform is on the table."
"One way or another we have to reform the financial system," he added, but cautioned that "not one proposal will solve all problems".
MPs on the Treasury Select Committee heard that major structural change was needed rather than a limit on a bank's size.
And immediate measures to hike the amount of capital required to be held on bank balance sheets could risk preventing banks from lending to the economy at a time when it needs it most, said Mr King.
The Treasury Select Committee hearing comes less than a week after President Obama shocked the sector with proposals to limit the activities of banks, seen as a step towards splitting investment banks and retail banks.
His proposals include a ban on retail banks from using their own money in investments - instead being limited to investing their customers' funds - and restrictions on the abilities of banks to make high-risk trades.
Paul Tucker, deputy governor of the Bank of England, told the cross-party group of MPs that restricting the size of banks may be "one ingredient", but would not be enough on its own.
The central bank chiefs agreed with US proposals that wholesale creditors should also share the pain and that taxpayers must not be allowed to shoulder the cost.
However, Mr King dismissed the idea of a "Tobin tax" on all financial transactions floated by Prime Minister Gordon Brown at a recent G7 summit.
"Of all the components of radical reform, I think a Tobin tax is bottom of the list," he said.
"It's not thought to be the answer to the too big to fail problem - there's much more support for the idea of a US-type levy."
Mr King put forward a three-pronged approach to changing the structure of the system, with more capital and greater liquidity of banks needed as part of a complete rethink.
"I'm not saying that anyone should be expected to sign up immediately to any one proposal but, unless we think about it, we'll be doomed to repeat the crises on an even bigger scale," said Mr King.
"The important thing is not to choke the ability of the banking system - this is not the moment to change capital requirements, but time to change the structure," he said.
Chancellor Alistair Darling said in a newspaper interview at the weekend that the US plans would not have prevented the crisis and that its decision to go it alone threatened global unity on bank reforms.
Mr King's views have regularly been at odds with the Government in recent months and he has been a fervent supporter of a separation of banks since the financial crisis struck.
He became the first British policymaker to moot the idea of splitting what he termed the "casino trading" of investment banks from high street banks last spring.
But he appeared to play down the suggestion of breaking up banks in today's meeting with MPs and said it was the structure of the system that needed to change and not bank behaviour.
Authorities should accept that there will be future bank failures, but have the processes in place to ensure the wider sector is not brought down with them, stressed Mr King.Reuse content