The Bank of England governor, Mervyn King, has launched an outspoken attack on the banking industry's failure to reform despite "breathtaking" levels of taxpayer support.

King described the current regulatory system as impractical and endorsed calls for retail banking to be split from riskier investment banking.

He said: "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".

He added: "The case for a serious review of how the banking industry is structured and regulated is strong."

In a speech to business leaders in Edinburgh, King warned that the government would have to significantly reduce the deficit and that individuals would have to become savers rather than spenders in the years ahead.

"Our national debt is rising rapidly, not least as the consequence of support to the banking system." he said. "We shall all be paying for the impact of this crisis on the public finances for a generation.

"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."

King's speech came as several banks, including those part-nationalised at the height of the financial crisis, prepare to pay out billions of pounds in bonuses. The City is reportedly expecting a 50 per cent rise in annual bonuses to £6 billion.

Last week the investment bank Goldman Sachs announced that it had earmarked £10.3 billion in compensation and benefits for staff in the first nine months of 2009.