Mervyn King, the Governor of the Bank of England, called last night for banks to be split to prevent them becoming “too important to fail”, saying that tougher regulation would not prevent another financial crisis.

His comments came as it was confirmed that the public finances suffered their worst six months on record between April and September and as a respected economic forecaster, warned that it would take longer to close the UK’s budget deficit than the Treasury has been predicting.

Addressing Scottish business leaders in Edinburgh, Mr King attacked those who are delaying reform of the banking sector and warned that the UK would be paying for the impact of the financial crisis on its public finances “for a generation”.

Mr King said that “it was hard to see why” some claimed that it was “impractical” to restrict government guarantees to “utility banking”, such as running payments systems or lending to households and businesses, while ruling out such support for riskier activities, such as speculative trading.

He added: “What does seem impractical, however, are the current arrangements. 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 now are.

“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.”

Mr King said that if banks proved reluctant to split their “utility” activities from their riskier activities, the sector could end up with “ever increasingly detailed regulatory oversight”.

He said that such regulation could prove costly for the industry and repeated his call, first made in June, for banks to be made to plan for their own orderly wind-down in the form of a living will.

However, the Treasury and the Financial Services Authority have rejected the idea of splitting up the banks, and the Conservatives assert that Britain acting alone would be ineffective.

Mr King said that the sheer scale of support to the banking sector from taxpayers was “breathtaking”. He said that, although a number of UK banks remained “extraordinarily dependent” on the public sector for support, this was “not sustainable” in the medium term.

He added: “To paraphrase a great wartime leader, never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform.”

The Governor, who said it was likely that the economy had returned to “modest” growth during the second half of the year, indicated that interest rates were set to remain low for some time to come.

Although inflation could spike higher in coming months because of higher petrol prices, he said, the weak pound and an imminent rise in VAT were “pulling back” on inflation.

Mr King spoke hours after it was confirmed that, in the six months to September, government borrowing had hit a record high of £77.3 billion as the recession took a heavy toll on tax receipts.

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