Sir Mervyn said there was no need for a Leveson-style inquiry, but admitted “something went very wrong with the UK banking industry and we need to put it right”.
The governor’s comments came as a fresh mis-selling scandal involving complex financial products added to the anger surrounding the rate-rigging affair uncovered at Barclays earlier in the week.
Taxpayer-backed Royal Bank of Scotland also confirmed it was being investigated for manipulating the rates at which banks lend to each other, known as Libor.
Sir Mervyn said: “From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates and now news of yet another mis-selling scandal we can see we need a real change in the culture of the industry.”
He added that hard-working bank staff have been “let down” and that banks now needed “leadership of an unusually high order”.
The Financial Services Authority (FSA) revealed earlier that Barclays, HSBC, Royal Bank of Scotland and Lloyds Banking Group had agreed to pay compensation to customers who were mis-sold interest-rate hedging products.
Some 28,000 of the products have been sold since 2001 and may have been offered as protection – or to act as a hedge – against a rise in interest rates without the customer fully grasping the downside risks.
Martin Wheatley, managing director of the FSA’s conduct business unit, said: “For many small businesses this has been a difficult and distressing experience with many people’s livelihoods affected.”
The findings come after Barclays was fined £290 million by UK and US regulators for manipulating the rate at which banks lend to each other, and echoes the costly payment protection insurance (PPI) mis-selling scandal that emerged last year.
Banks are facing the threat of a criminal investigation over fixing the interbank lending figures that affect millions of homeowners and small firms.
The Treasury has started to look at strengthening criminal sanctions for those responsible for market abuse after the FSA exposed the dealings at Barclays on Wednesday.
Serious Fraud Office investigators are in talks with the regulator over the scandal, while pressure is mounting on Barclays chief executive Bob Diamond to stand down.
Prime Minister David Cameron said it was very important that accountability for what went on “goes all the way to the top of that organisation” and that Mr Diamond had “some serious questions to answer”.
In a further blow, the Financial Times called directly on the senior banker, who it said was behind the bank’s “hard-driving culture”, to step down.
However, Mr Diamond, who was head of the bank’s investment arm at the time of the allegations, reportedly told a meeting of analysts at US bank Morgan Stanley that he would not resign.
The American banker, who waived his bonus for 2012 in light of the claims, has agreed to appear in front of the Treasury Select Committee to account for his bank’s actions.
HSBC and taxpayer-backed Royal Bank of Scotland are among several other lenders being investigated by the City watchdog for trying to influence Libor – London interbank offered rate – and Euribor interbank lending rates to boost their profits.
Sir Mervyn said there needed to be a change in the way Libor was calculated based on “observations of actual market transactions” rather than getting banks to supply rates.
“The idea that my word is my Libor is dead,” he added.
He also backed proposals to ring-fence retail banking divisions from investment arms as a way of addressing some of the issues that have emerged from the most recent developments.
TUC General Secretary Brendan Barber said Britain’s banking system was “out of control”.
He said: “We are now paying a heavy price for the decades when banks and finance persuaded politicians that they were the new engines of growth.”
Shadow chancellor Ed Balls disagreed with the Bank Governor and said there was a case for an inquiry into the culture of banking.
He said: “We can’t just brush this under the carpet. People are shocked by the swaggering arrogance of what we have discovered in the last 24 hours. We need to open this wide open.”
Speaking from Brussels, Prime Minister David Cameron said: “People are rightly angry about the behaviour of the banks and so am I.
“People want to see real accountability for what has happened. When people have broken the rules, they should face the consequences and this
needs a change of culture absolutely, as the governor of the Bank of England has said today.
“I know that Bob Diamond has quite rightly agreed to appear before the Treasury select committee. As I said yesterday, he and his management team have serious questions to answer.”
Mr Cameron said it was vital all investigations into the scandal went “wherever the evidence leads” and held those responsible to account “without fear or favour”.
He added: “Dealing with this whole issue is vital for the Government,
frankly it is as vital as dealing with the unsustainable debts that we were left by the last government.”