There must be profound changes in the banking system if a repeat of the current crisis is to be avoided, the Financial Services Authority has said.
Lord Turner, head of the City watchdog, said parts of the regulatory system were "seriously deficient".
He recommended that banks should be forced to build up capital during good times, so they could more easily weather an economic downturn.
It comes after the government announced a second bail-out for British banks.
Delivering The Economist magazine's first City lecture of 2009, Lord Turner accepted the FSA had made mistakes in monitoring Northern Rock, which was nationalised in February 2008 after a run on the bank in 2007.
Systemic failure
He said they "failed to piece together the jigsaw puzzle" of risks which included a large UK current account deficit, rapid credit extension and house price rises.
But he said bankers, regulators, central banks, finance ministers and academics across the world shared the blame for failing to identify the risks which had been building in the financial system for a number of years.
Lord Turner said regulators would have to consider how banks deemed too big to fail might be restricted from taking particularly high risk.
He also called for international co-operation to find a way to intervene before the risks in the financial system got out of control.
"The changes which we need to make to create a sounder system for the future will be profound," he said.
"Central banks and regulators between them need to... identify the combination of measures which can take away the punchbowl before the party gets out of hand."
He said banks should now be required to build up "substantial capital buffers in good economic times... so that they can run them down in bad".
On Monday, the government announced a second package of measures to encourage banks to lend to individuals and businesses.
The long list of policies includes a scheme to offer insurance against banks losing more money from the bad debts that started the credit crunch.
In October, the Treasury ploughed �37bn into the banking system to provide a platform for normal lending to resume.
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