Ministers must come down hard on the greed and excesses of the City to ensure that markets never return to “business as usual”, the Chief Secretary to the Treasury said yesterday.

Yvette Cooper gave warning that banks could not expect the Government to bail them out without afterwards clamping down on their activities and putting in place more stringent regulation.

“You can’t just have the public sector step in to pick up the pieces and then have the markets go back to business as usual,” she told The Times. “Clearly mistakes were made and there has been greed and excess that’s got to be dealt with. Changes need to be made.”

She was speaking after Gordon Brown said that he would back measures to crack down on banks’ excessive bonus schemes as part of his mission to “clean up” the City.

The Bank of England will have greater powers of intervention under banking reforms to be introduced next month. But Ms Cooper said that the most important changes needed to happen at an international level.

Mr Brown will use a visit to New York this week to push the International Monetary Fund (IMF) to change its role to one of global surveillance, rather than focusing on risks taken by individual countries, she said.

The Prime Minister refused in a BBC interview to admit that he had failed to recognise that there was a debt bubble. However, Ms Cooper conceded: “I don’t think anybody, anywhere in the private or public sector, had fully assessed where the risks lay” in packaging up US mortgages and selling them around the world. “The big question is, who is looking at these global systemic risks?” she said. “That’s where we need the IMF to play a much stronger role.”

Ms Cooper declined to say whether the Treasury had plans for a scheme similar to that announced by the US Federal Reserve to let banks dispose of “toxic debt” products.

So far the Treasury has said it would authorise a £100 billion lifeline to financial institutions from the Bank of England, but Alistair Darling, the Chancellor, is also working on other measures to help to restart the stagnant mortgage market.

“We are looking at a range of issues,” Ms Cooper said. All eyes are now on the Chancellor to see what measures he will announce in his PreBudget Report next month.

Ms Cooper said that, whatever was decided, public borrowing would rise, adding it was right that the Government should borrow more when the country faced severe economic difficulties. While Ms Cooper talked tough on the banks, she also made clear that regulation would not be made excessive. “What you can’t do is go to the other extreme and say that because of the global problems, what you need is a heavy-handed regulatory approach that insulates us from those sorts of global forces,” she said. “Actually you need to be able to encourage innovation [to allow] financial markets to work effectively and efficiently.”

But doing nothing equally was not an option. “It would have been completely wrong to just let the markets fail,” the minister said, adding that the Conservatives’ hostility to nationalising Northern Rock and their refusal to ban speculative investors short-selling bank shares were simply wrong.

“That kind of approach, the free-market, right-wing approach, would clearly be devastating. You simply could not let that kind of thing happen. The impact on savers and on confidence and credit across the world would have been too destructive in the long term.”

Times Recommends

• Equitable Life halts £7bn sale on market turmoil
• Potential buyers emerge to save Woolworths staff
• Terrorist attacks close Bombay Stock Exchange