The Chancellor has handed over powers to the Bank of England to prevent a repeat of the banking excesses which triggered the recession.
George Osborne announced the abolition of the Financial Services Authority in a shake-up of City regulation which he said would produce "a new settlement between our banks and the rest of our society - a fairer settlement in which the banks support the people, instead of the people bailing out the banks".
Regulatory powers will be returned to Threadneedle Street with the creation of three new bodies within the Bank to deliver prudential regulation of financial firms, financial stability, and consumer protection.
In his first Mansion House speech as Chancellor, Mr Osborne said uncertainty over regulation must be dispelled to allow a return to more normal lending and to meet the Government's broader economic goals.
The "tripartite" system introduced by Gordon Brown in 1997, which shared responsibilities between the Bank, FSA and Treasury, had "utterly failed to identify, let alone prevent" the rapid and unsustainable increase in debt which led to the financial crisis, he said.
The system created a situation in which "no-one was controlling levels of debt, and, when the crunch came, no-one knew who was in charge".
Explaining his decision to give the Bank of England responsibility both for the overall financial system and for regulatory oversight of individual institutions, Mr Osborne said: "Only independent central banks have the broad macroeconomic understanding, the authority and the knowledge required to make the kind of macro-prudential judgments that are required now and in the future.
"And, because central banks are the lenders of last resort, the experience of the crisis has also shown that they need to be familiar with every aspect of the institutions that they may have to support."
The independent FSA will cease to exist in its current form in 2012, while the new bodies will be set up over the coming months and operate in shadow form until that date, Mr Osborne told his audience of City bankers.
A new Prudential Authority, operating as a subsidiary of the Bank of England, will regulate retail and investment banks, building societies and insurance companies.