The Archbishop of Canterbury has accused chancellor George Osborne of lacking the political will to break up the big banks.
The Most Rev Justin Welby warned Mr Osborne he was risking a repeat of the "disasters" of the recent past through his refusal to take more decisive action.
George Osborne defended his position on the City of London
The chancellor however dismissed his approach as unrealistic, insisting it would mean the end of the City of London as a global financial centre.
The two men clashed when Mr Osborne appeared before the Parliamentary Commission on Banking Standards at Westminster.
The Archbishop - a former oil industry executive who sits on the commission - said the evidence they had received made clear that large, complex banks were not only "too big to fail, they are too big to manage".
Nevertheless the chancellor, he said, continued to defend a system based on "a small group of absolutely colossal banks" - including the mainly state-owned Royal Bank of Scotland (RBS).
"Is this lack of will to break them up and reduce them to a size that eliminated risk to the economy not simply a recipe for a repetition of the disasters we have seen in the last few years?" he demanded.
Mr Osborne insisted such a drastic solution was not possible in a highly inter-connected global economy.
"I don't think it would be possible to create in Britain a world where we just had a lot of small banks. We live in a highly connected global economy," he said.
"Some of the big players in our country are not British banks. Unless we were to close our doors to all of them and close our financial centre - I don't think that's realistic."
Mr Osborne also rejected a proposal by Conservative former chancellor Lord Lawson to break-up RBS in a "classic good bank-bad bank split".
The Archbishop of Canterbury accused the chancellor of 'lacking political will'
Lord Lawson said it would enable the re-privatisation of the "good bank" much sooner than would otherwise be possible, while increasing its lending to small and medium firms unencumbered by the bad debts which would remain with the "bad bank".
The chancellor however said that it could cost up to £10 billion to buy-out the minority shareholders, while dividing it into good and bad banks could take up to 18 months to complete.
"You have to weigh the merits of that approach - including the upfront cost, the complexity of separating the bank, the fact that you would be left with the bad bank on your books for ever until it had run off, and then you'd have your new bank and you'd privatise it - you'd at least have to weigh against the current strategy," he said.
"I think the obstacles to your approach are very considerable."
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