The UK head of the Financial Services authority warned that the age of cheap credit may be over.
In an interview on BBC radio, Hector Sants said he did not think financial markets would return to where they were before the global credit crunch which has caused turmoil across world markets in recent months.
"I don't think markets are ever going to return to the way they were," Mr Sants said. "The idea that at some point they will go back to normal, I think, is a misnomer.
"The new normal will be different from the way that markets behaved in the past."
Mr Sants said he believed banks would revert to more old-fashioned and straightforward ways of lending, and would retreat from more complicated products which allow them to package and sell on cheap loans.
"We still believe that that will be doable, but probably using simpler and more understandable vehicles which investors who are buying this dispersed risk can have greater confidence in," he said.
This, he said, could mean the costs of borrowing for consumers was likely to rise.
"If we do see... as is generally forecast, a deterioration in the real economy, consumers will find paying their financial obligations more difficult than they were in the past," he said.
Mr Sants also stressed that banks and financial firms must be as rigorous as possible about not mis-selling products and ensuring consumers genuinely understood what they were getting.
"This strategic rebalancing may further effect the availability and price of credit, but from a regulators point of view that is not necessarily a bad thing," he said.
"Easy credit is not necessarily good for either consumers or the economy in the long term."
Mr Sants also criticised banks' remuneration systems, suggesting that the culture of paying out big bonuses to employees might encourage excessive risk taking.
"There is a risk that the remuneration structures are too short term and that they do incentivise behaviour which is not helpful in terms of maintaining long-term financial stability."
The banking sector was rocked last September by the near-collapse of Northern Rock and a run on its deposits after a global credit crunch forced the country's fifth-largest mortgage lender to turn to the Bank of England for funds.
Mr Sants, whose FSA has come under fire for its role in the Northern Rock saga, conceded his organisation could have managed the situation better, and should have ensured Northern Rock's management were more aware of the risks they were running.
"We were clear from the outset that the standard of supervision of Northern Rock was not acceptable to us," he said. "That needs to be addressed."
The FSA is due to publish the conclusions of its review of the Northern Rock crisis at the end of next month.