Sir Mervyn King dismissed the Royal Bank of Scotland's turnaround strategy as "a nonsense" and called for the bank to be split in two to make it easier to sell and recoup tax-payers money.
Speaking at a banking standards select committee meeting on Wednesday, Sir Mervyn pulled no punches when he said the current strategy being adopted by the Treasury and RBS's chief executive Stephen Hester should be abandoned in favour of a much more radical course.
"The whole idea of a bank being 82% owned by the taxpayer, run at arms' length from the government, is a nonsense," he said.
"It cannot make any sense. I know it was put there for good reason. People didn't want politicians running banks. But I think it would be much better to accept that it should have been a temporary period of ownership only - to restructure the bank and put it back. The longer this has gone on the more difficult that's become."
Sir Mervyn favours splitting the bank into two parts, a 'good' bank and a 'bad' bank, which will hold all of RBS's assets that are likely to generate continuing losses. The restructuring would allow the government to repackage the good bank and sell it off at a profit, returning the tax-payers money in the process.
"Accepting that and facing up to the reality would be the right way forward," he urged. "The sad thing is that the UK led the world in bank recapitalisations - it was an idea the US took from us. But they were more decisive in the way they did it than us."
On the bankers bonus cap
Sir Mervyn was also asked for his view on the EU vote to cap bankers' bonuses to 100% of their wage, or 200% if agreed by shareholders.
"My concern about the EU proposal in setting this hard limit is it looks tight, and risks pushing up fixed remuneration. Fixed remuneration is cash out the door, and it's harder to get that back, legally," he said.
"What we have done (in the UK) over recent years, is to achieve a world where less cash going out of the door - which I favour strongly as banks need to retain more cash to build up their capital base... (and introduce) more deferral, which we think, in world we live in today, is a sensible way of (dealing with) incentives."
He added that a cap imposed by Brussels wouldn't have the effects desired by its supporters, but neither did he think the outcome would be as bad as opponents to the move are predicting.
"There is perfectly justifiable concern about remuneration in banking... But these are symptoms, not causes... I do not think Prudential Regulatory Authority (the soon to be launched financial regulator) should be focusing too much on individual plans, it should focus on the 'too big to fail' issue."
MP Andrew Tyrie who was chairing the debate, asked Sir Mervyn if he thought the banks were too successful in getting politicians to support their demands - hinting at the chummy relationship between the bankers and the Treasury.
Sir Mervyn responded by saying that he was surprised by the degree of access the chancellor got to the bank executives, adding the Treasury got more access than the regulators to banking's top dogs.
"The regulator knew if they were tough on a bank, that bank's chief executive would go straight to Number 10 and say they were attacking the most successful industry in the UK," he said.
Sir Mervyn also acknowledged that the Funding for Lending figures earlier this week, which showed a fall in net lending to UK businesses, were "disappointing but not surprising", given the troubles of many of Britain's banks.