Alistair Darling warned today that other major banks faced a sharp reduction in profits after the boss of Citigroup resigned.
The Chancellor insisted that "transparency" had to be improved in the wake of the global credit crunch, but stressed that UK banks had strong balance sheets and the fundamental economic position was strong.
Speaking on the BBC Radio 4 Today programme after Citigroup chairman and chief executive Charles Prince announced his departure, Mr Darling said: "We need to get to a far better situation where there is a great deal more transparency, more openness, so people understand the risks to which these banks have become exposed and they can avoid being so exposed in future.
"I do think we need to get it in perspective, but without doubt some of these big banks will see a reduction in profits as you have seen today."
Mr Darling said he expected banks to be more "cautious" in their lending following the crisis, which was sparked by huge bad debts in the US sub-prime housing market.
He insisted it was "no bad thing" that institutions would be less cavalier about handing out cash, and added that he had already taken account of the impact of the credit crunch by revising down his growth forecast.
"The fundamental point is that the British economy is strong. It's been growing now for well over 10 years," Mr Darling said. "There are grounds for believing that we will get through this. We have a strong economy, its momentum will carry us through."
In an overnight announcement, Mr Prince said his resignation "was the only honourable course" after the world's largest bank racked up billions in losses and write-downs from exposure to high-risk mortgage debts.
The banking giant has warned of up to 11 billion US dollars (£5.3 billion) extra in write-downs on so-called "sub-prime" mortgages, on top of the 6.5 billion US dollars (£3.1 billion) it admitted three weeks ago.
As a result, profits have plummeted by 57% in the third quarter.
Citi is the latest in a string of major investment banks to come under intense pressure due to exposure to sub-prime losses.
This in turn has put banking shares under pressure in the UK amid investor concerns over potential losses.
The bank's current financial woes could have implications for the group's workforce of more than 300,000 staff worldwide. It employs around 12,000 people in the UK.
Sir Win Bischoff, Citi's European chairman, is to take over as interim chief executive.
Mr Prince's departure follows the exit of Merrill Lynch chief executive Stan O'Neal, who retired last week after the bank posted losses of 2.3 billion US dollars (£1.1 billion) - the biggest in its 93-year history.
Merrill was also hit by huge write-downs of 7.9 billion US dollars (£3.8 billion) on sub-prime exposure.
But the Citi boss's departure could be sweetened by a severance package and share options worth up to 87 million US dollars (£41.6 million), according to weekend reports.
A leading Wall Street analyst last week predicted that major investment banks could have to shoulder another 10 billion US dollars (£4.8 billion) in write-downs, but this estimate now looks conservative following Citi's latest announcement on sub-prime exposure.