Lord Turner, who heads the Financial Services Authority, said with hindsight the banks were left in a weak state despite the billions of pounds pumped into them by the government after the Lehman Brothers collapse in 2008.
With higher capital reserves, the banks would be in a position to maintain bigger buffers against the shocks from the UK's slide back into recession and the difficulties faced by countries in the eurozone, he argued.
A bigger bailout would have taken the taxpayer's ownership of Royal Bank of Scotland to 100% and pushed up the current 43% shareholding in Lloyds Banking Group. It may also have resulted in Barclays, Santander and HSBC being forced to accept taxpayer funds.
"Looking back, and with the benefit of what we know now, I would have recommended UK banks have a higher level of capital and a boost to the counter-cyclical buffers they needed for the coming recession," he said.
Speaking at a debate on the regulation of financial markets in Tokyo, Turner made it clear he believes the UK's major banks remain too weak to increase lending at a time when the economy remains fragile.
"The recovery from recession has been far slower than most commentators and all official forecasts anticipated in 2009.
"That reflects our failure to understand just how powerful are the deflationary effects created by deleveraging in the aftermath of financial crises.
"When credit booms turn to bust – as we know from Japan throughout the 1990s – private-sector deleveraging can have powerful deflationary effects, and conventional policy levers lose power," he said.
Last week it emerged that the FSA loosened capital rules on British banks, freeing up funds for lending to businesses and households that would otherwise have been set aside for capital reserves.
Without recourse to further taxpayer funds, banks must freeze lending unless they are given leeway to use their reserves by the regulator.
It is understood that Sir Mervyn King, the central bank's governor, argued for a bigger bailout at the time of the Lehman's crash because he felt banks were under-capitalised.
The Obama administration is credited with putting into operation the most comprehensive bank bailout and being rewarded with a rapid return to growth. The US has also avoided a second recession, unlike the UK and many other European countries.
Goldman Sachs and Bank of America were among many major banks forced to take government funds to reassure the markets, which they have all since paid back. Figures this week show the US housing market recovering and a strong jump in consumer confidence.
Turner, who has applied to succeed King as governor, is garnering a reputation for saying the unsayable.
Addressing an audience of financial services executives at the Bretton Woods conference in Tokyo, he said policymakers should be ready to design more innovative ways to kickstart the flatlining economy. Turner has supported the Bank of England's policy of quantitative easing, which has pumped £375bn into the economy but, like many senior officials, he is concerned that its effectiveness is waning.
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