In a lecture at the London School of Economics, marking the 20th anniversary of UK inflation targeting, he said the natural first line of defence against financial crises was macro-prudential policy, declaring: "With hindsight, before 2007 there should have been a cap on the leverage of banks.

"And the cap should have tightened as asset prices increased and the likely exposure to losses increased."

He added this was why the UK now had a macro-prudential policy regime, which will be overseen by the Bank's Financial Policy Committee.

The FPC will have the power to direct, and make recommendations to, regulators about capital and leverage in the financial system.

Reflecting on the run-up to the financial crisis, Sir Mervyn said: "It is arguable, though not certain, that in the absence of a macro-prudential regime or tighter fiscal policy, persistently higher interest rates might have been a second-best strategy. It would, though, have been a big gamble."

He added: "It would be sensible to recognise there may be circumstances in which it is justified to aim off the inflation target for a while in order to moderate the risk of financial crises."