Margaret Thatcher was warned about the dangers of deregulating the banks prior to the Big Bang of 1986, according to files released by the National Archives.
Sir Robert Armstrong, the Cabinet secretary, expressed fears of “unscrupulous” money-making and “a bubble that will be pricked in a year or two”.
The Big Bang was a super-lucrative revolution in the financial sector which introduced electronic screen-based trading and opened up the Square Mile to international banks.
The reforms ensured London’s place at the heart of global financial markets, but critics say they paved the way towards the great banking sector crash of 2008.
Seven months before the event, Sir Robert, Margaret Thatcher’s most senior official, wrote a memo saying: “There is increasing disquiet about the things that people think are going on in the City.
“I do not just mean the levels of remuneration; a lot of people, including some from inside the City, think that is a bubble that will be pricked in a year or two.
“They think more about the way in which corners are being cut and money is being made in ways that are at least bordering on the unscrupulous.
“It tends to be summed up by the people saying that they doubt whether it really is good enough any more to leave the policing of the City to self-regulation.”
David Willetts, who was then working in the No 10 policy unit but went on to be a Tory minister, co-authored a paper for the Prime Minister on the likely impact of the Big Bang.
The report expressed concern about “unethical behaviour” and that financial deregulation could lead to “boom and bust”.
But he concluded that while there might be “individual financial failures” he did not expect “a systemic problem”.
The correspondence, released after 30 years in the archives, show ministers were mindful of the risks but most dismissed them, fearing the greater danger was the City becoming less competitive.