Asking whether regulators have gone too far in imposing tougher capital requirements after the 2007-09 financial crisis, Cunliffe said some reforms will need "fine tuning".

It was wrong, however, to imagine there was some recent "halcyon" world of banks supporting the economy and that it can be recreated quickly by loosening the regulatory straitjacket, he said.

"The post-crisis world requires a major adjustment in bank business models," Cunliffe told a dinner held by The CityUK, which promotes Britain's financial services sector.

"This is not some unintended consequence of overzealous regulation. It is a necessary, if painful adjustment to a new reality," said Cunliffe, who is responsible for financial stability at the Bank.

Banks have complained that burdensome regulation makes it more expensive to lend to companies or to make markets in shares or bonds to raise funds.

HSBC bank has said regulation is one of the factors it is considering in deciding whether to keep its head office in Britain. Chancellor George Osborne this month announced that a levy on banks, which HSBC pays, will be slashed.

In addition, he gave the Bank's Financial Policy Committee (FPC) an added remit of ensuring that Britain is an attractive place for international financial firms. He also refused to extend the term of Martin Wheatley, the hard-line chief executive of the Financial Conduct Authority and FPC member.

Cunliffe said economic growth and productivity were not antithetical to regulation.

"The implementation of the detailed reforms will inevitably throw up unforeseen effects in particular places, and where it is justified we will need to revisit issues," Cunliffe said.

"But we should be careful about talking about turning back the overall regulatory dial or trying to trade off the risk of financial instability for short-term growth."

The Bank will begin tailoring its annual stress test of banks according to the economic cycle, with a tougher exercise during boom times when credit risk is building up and easing when the economy slows, Cunliffe said.

(Reporting by Huw Jones, editing by Larry King)

By Huw Jones