The Financial Services Authority (FSA) has warned banks that the crisis in the financial markets will force them to change the way they do business.
FSA chief executive Hector Sants said banks will never again be able to raise as much money as cheaply as they had been doing by selling off their loans.
In an exclusive interview with the BBC, he said they will have to keep more of their loans on their own books.
That, in turn, may permanently push up the cost of borrowing for all of us.
"Banks themselves need to give consideration to how their business models will need to adapt to the changed market circumstances they have seen," said Mr Sants.
Hector Sants said that the way bankers are rewarded is not helpful to financial stability... which, from an habitually cautious regulator, represents a sound ticking off for the City
Robert Peston, BBC business editor
"Secondly, we will be looking for firms to treat their customers fairly in these arguably more difficult times in prospect."
BBC business editor Robert Peston said the implication of Mr Sants' position "will be a pretty steep reduction in the amount of credit available and the cost of it".
Mr Sants will also deliver this stark message to 300 banks and other financial institutions in a speech later on Wednesday.
He also gave greater detail in his BBC interview on what he describes as the FSA's unacceptable performance as the supervisor of Northern Rock.
He says that an internal review has shown that the FSA correctly identified the risks being run by Northern Rock - which borrowed the majority of its funds from the wholesale financial markets.
Yet Mr Sants said the FSA failed to communicate properly with the bank's management to force a reduction in those risks.
He insists that the review, which will be published in a few weeks, will be no whitewash.
© British Broadcasting Corporation