Britain has the most "profoundly dysfunctional banking system" of any G7 country and must be overhauled, the Government has been warned.
Labour former minister Michael Meacher criticised the UK's banking model, which links "speculative investment with retail deposit-taking", citing this as a major cause of the economic crisis.
He also hit out at "extreme light touch regulation" of financial institutions that "left too much to the markets".
Opening a backbench-led debate on banking reform, Mr Meacher told ministers: "At present Britain has, and I don't think this is an exaggeration, the most profoundly dysfunctional banking system of any G7 country, and it came nearer to collapse than any other in the autumn of 2008.
"I believe we need to break up the mega banks with their addiction to mortgage lending.
"We need smaller banks, we need in particular specialist business banks, infrastructure banks, housing banks, green banks, creative industries banks, and all the others.
"Only this kind of fundamental reform of the banking system can provide the foundations for the economic and social transformation of this country which we all want."
He said the financial crisis was caused by various factors including an "overlax" monetary policy, the development of credit derivatives, a banking structure which allowed banks to be "too big to fail", and the role of "enormous bonuses which drove the recklessness".
Mr Meacher (Oldham W and Royton) called for a separation of investment banks from retail banks, warning that the taxpayer guarantee on retail deposits currently provided "collateral" for financial trading.
"The crux of this model is that the withdrawal of the taxpayer guarantee would be a sufficient deterrent to protect investment banks engaging in highly risky investment which might collapse with serious and far-reaching consequences for the national economy," he said,