Regulators and governments across the West must not lose their resolve to see through a radical overhaul of banks and financial supervision, the world's top central bankers have warned, echoing a tough weekend message from Lord Mandelson, the Business Secretary.

In its annual report, the Bank for International Settlements (BIS), regarded as the “central bankers’ central bank”, which is coordinating debate over a long-term shake-up of the financial system, highlighted “the risk that officials will fail to finish their repair task”.

“Even in the face of what might appear to be the first signs of recovery in the real economy, officials must persevere until the job is done,” the influential BIS argued.

It noted that short-term emergency measures to prop-up stricken banks were fostering severe, longer-term headaches that must be tackled, including the creation of an “uneven playing field” between now state-backed banks and competitors still wholly in the private sector.

Bailouts by governments of troubled banks had reduced pressures on their managements to clean up their institutions' finances, while forced mergers between banking groups had also created even more complex, unwieldy institutions that were hard to manage or police, the BIS warned.

It urged that governments across the West move faster to overhaul the financial system since delay would jeopardise efforts to restore sustained economic growth.

“Ultimately, the reluctance of officials to quickly clean up the banks … may well delay recovery,” it said. “To speed economic recovery, authorities must act quickly and decisively in their efforts to repair the financial system, and must persevere until the job in done.”

Even if this was done, the BIS echoed other warnings from central banks that the West’s recovery could be slow and weak. Revived growth was liable to be hampered as households and businesses moved to cut down their debts and rebuild their finances, while consumers reacted to the blow to their wealth from steep falls in house prices and shares.

The pace of recovery would also depend critically on the impact of banks’ own efforts to bolster their finances and how much this slowed a return to more normal credit and lending conditions.

Mario Draghi, the head of the newly-created Financial Stability Board of leading economies worldwide and Governor of the Bank of Italy, said in Basle that the financial system was “not out of the woods yet”.

The meeting in Basle set in motion a range of official reviews of the international financial system in coordination with other specialist oversight bodies, tackling bank capital requirements, simplified accounting, and national regulation among other issues. "Much of this will come to fruition before the end of this year," said Draghi.

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