Speaking as ministers weigh up a potential tax raid on the sector, the former chief regulator at the Financial Services Authority (FSA) warned that the UK banking market was at a “tipping point.”

Sir Howard explained that UK banks were the highest taxed in Europe at 46.6% as he cautioned against further levies and overcapitalisation, which risked driving international lenders away from The City while forcing domestic banks to increase borrowing costs.

He told the Sunday Telegraph: “If we carry on being the most highly taxed banking market in Europe, at what point will that seriously affect the location of activity? That’s where we could be quite close to a tipping point, given that we’re already the most highly taxed.

“Over time, it would be a reduction in deposit rates and an increase in mortgage rates to re-establish your net interest margin, maintain your profitability and allow people the confidence to lend to the bank.”

The city grandee explained the giants such as NatWest, Lloyds and Nationwide would have little choice but to “pay up” leading to increased borrowing. UK Finance claimed in research that for every 0.25 percentage point increase in the cost of borrowing, roughly £300 a year was added in interest payments to a typical mortgage of under £140,000.

Sir Howard also called on the UK Government to scrap the multi-billion-pound ring-fencing regime, which separates retails operations from investment banking arguing it relies on outdated assumptions.

He added: “It’s 100% useless and should be scrapped,” explaining the only reason it hasn’t been removed is because it requires primary legislation, adding: “Parliament is hardly going to introduce the ‘liberate the banks’ bill.”

While traditional high-street banks are heavily regulated and overcapitalised, Sir Howard claimed regulators are ignoring where the next real crisis will emerge: the $2.5 trillion private credit market.

The former regulator said that the rapid expansion of shadow banking, driven by excessive leverage, funds borrowing against uncalled investor commitments and heavy hedge fund exposure in the gilt market, represented the most likely triggers for the next financial crash.

He said: “Undoubtedly, the expansion of private credit is a worry. It is now bigger than the banking sector. I think it would not astonish me at all if there were some pretty nasty bumps on that road.”

Sir Howard cautioned the lack of international regulatory consensus, claiming it was being stalled by the US’s push for deregulation, leaving the global markets exposed to systemic shocks while traditional banks remain overburdened by domestic policy constraints.