In an extraordinarily outspoken speech last night, the Governor of the Bank of England, Mervyn King, described the regulatory system framed by Gordon Brown in 1997 as "inadequate", claimed that wrongly incentivised bankers had been "playing with fire", and said that a central tenet of the Financial Services Authority's new approach was a "delusion".

Such failures had, suggested Mr King, meant that "we shall all be paying for the impact of this crisis on the public finances for a generation".

Close to £1 trillion of public money has been devoted to supporting the financial sector. Mr King called the sums "breathtaking" and "not sustainable in the medium term".

Download the new Independent Premium app Sharing the full story, not just the headlines

"Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we are now.

"It is important that banks in receipt of public support are not encouraged to try to earn their way out of that support by resuming the very activities that got them into trouble in the first place," he said.

The current "tripartite" system of regulation was framed by Gordon Brown when he became Chancellor in 1997, at which point banking supervision was transferred from the Bank to the FSA. The basic architecture of the system has been recently reaffirmed by the Chancellor, Alistair Darling, while the Conservatives have said that they will return oversight of banks to the Bank of England.

Despite the risk that the Bank itself is being politicised by this controversy, Mr King laid into the Brown-inspired "inadequately designed regulatory system", which, he said, "ignited the fuel" that led to the conflagration that has engulfed the nation. Mr King added that "the past two years have shown how dangerous it is to let bankers play with fire", adding that "it is a matter of the incentives they face", pouring fuel of his own on to the debate about bankers' pay and bonuses.

Mr King also expressed thinly veiled contempt for the proposals made in the Turner review and the Treasury's White Paper on banking. He said that the structure and regulation of banking in the UK still "need reform" and called for a "serious review of how the banking industry is structured and regulated". The Governor did not so much as pay lip service to the chairman of the FSA, Lord Turner's review, or the White Paper. Indeed, Mr King explicitly ridiculed the notion, central to the Turner review, that increasing capital adequacy requirements on banks would be sufficient to deal with the widely acknowledged "too important to fail" problem. It is, said Mr King, "worth a try", but Mr King was still scathing – "the belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion".

Mr King repeated his call for a separation of so-called "utility banking", covered by a state guarantee to depositors, from other forms of investment banking. Such a system prevailed for many decades in the US under the Glass-Steagall Act, finally abolished in the 1990s, and, less formally, in the UK before the Big Bang reforms of 1986. He said that resolution of the issue was inevitable – "the sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the 'too important to fail' question".

Mr King said that there are now too few banks and that they yield too much market power, implying that they should be broken up. "By international standards UK banking is highly concentrated. There are four large UK banking groups. Of these four, two are largely in state ownership and their assets are a multiple of the assets of the next largest bank. As in the English premier league, getting into the top four will not be easy for those outside it."