Lessons must be learned from the financial crisis, Bank of England deputy governor Sir John Gieve has urged.

In a speech to the European Business School in London, Sir John warned there may be further shocks to the system to come but suggested reforms that could prevent future catastrophes.

Sir John said a total collapse of the banking system appears to have been warded off by the Treasury’s recapitalisation scheme and there are signs some confidence has returned to the market.

“However, we are clearly not out of the woods yet,” he added.

“Financial markets across the world are still badly impaired; spreads have not yet returned to their summer levels; and, while banks look more secure, many hedge funds for example are under increased pressure.”

Hedge funds, which are often used by pension providers, have been losing cash as shares plunge and several have already folded.

In addition, we are only in the early stages of recession, Sir John added.

“So we must be ready to take further action if required whether monetary, fiscal, or directly in the financial sector,” he said.

The Bank of England is likely to make further cuts in the interest rate, Sir John confirmed in his speech, although there are still uncertainties – in particular the contents of the pre-Budget report next week.

Although in the short-term it is important to react to events quickly and aim for a recovery as soon as possible, Sir John suggested reforms to the system.

Better international cooperation will be crucial, he said, as the effect the failure of Lehman Brothers on global markets showed.

Sir John said: “As a start I hope we can establish a robust and predictable framework of rules and conventions that ensure that home authorities will co-ordinate a cross-border response better. The Financial Stability Forum is working on these urgently.”

In addition, the deputy governor suggested a Spanish-style solution to ensure banks have enough capital in a downturn – to force them to increase their reserves in the good times, to have enough in the bad times.