Banks could face tough new rules that limit profits on lending, Sir John Gieve, deputy governor of the Bank of England, said on Wednesday.

Although Sir John presented the idea as his own, it is understood it is being considered by the Bank, which is working with the Financial Services Authority on improving oversight of the financial sector. Sir John is also a member of the Financial Stability Forum, an international group of regulators that has been seeking to improve co-operation on bank oversight.

"We have seen how the financial sector can drive the wider business cycle, by becoming over-confident in the upswing and overconstrained [by lack of financial resources - capital and liquidity] in the downswing," Sir John said.

He proposed two measures. The first would discourage rapid growth in lending. In the early period of rapid growth losses are light and problems do not become apparent for years. Requiring additional capital at a time when new loans are growing rapidly and before problems appear would act as a brake.

The second measure would set higher liquidity requirements for banks that borrow heavily. These banks would have to own a larger proportion of safe, relatively low-yielding assets such as Treasury bills. That would discourage banks from heavy borrowing because they would have to invest a portion in assets whose returns are lower than the cost of debt.

Although Sir John did not name any banks, he was describing the type of lending engaged in by the now-nationalised Northern Rock and Bradford & Bingley.

The remarks, made in a speech before the European Business School, go further than those by the Bank in its recent financial stability report, in which it made clear inadequate oversight of the international banking system was partly to blame for the excesses that are now unravelling with disastrous results.