"Banks have come to realise they are paying the price for having designed compensation packages that provide incentives that are not in the long-run interests of the banks themselves."
Mr King said the risky financial instruments were "based on some very poor assumptions".
Many of the world's largest banks have lost large amounts on these complex financial products, whose design meant investors underestimated or misunderstood the risks involved.
He said those banks which decided not to invest in these instruments - which were being described as "innovative, exciting activities," - were "often pilloried for being boring".
"We must make sure it doesn't happen again," Mr King said.
"I think all of us - and I do not exclude the Bank in this - have learnt a lot of lessons from the last nine months," the governor said.
Earlier this month, the Bank of England announced a plan to enable banks to swap potentially risky mortgage debts for secure government bonds in order to relieve a credit squeeze.
Mr King said the most recent crisis was not down to a lack of funds in the market - so-called liquidity - but was a result of a lack of confidence that meant banks were unwilling to lend to each other.
As a result, banks have been restricting lending to homeowners.
But the governor was keen to stress that the Bank of England's plan to loan £50bn was not a 'bail-out' of the banks and was not designed to stimulate mortgage lending.
Mr King said it would be a mistake to go back to where the mortgage market was a year ago, when loans were cheaper and easier to get.
However, despite not being the target for the loan scheme, Mr King said that if successful, homeowners should benefit from the scheme down the line.
"There is the need for an adjustment in the mortgage market," he said.
"But I do think the improved confidence in the banking sector, which I think this scheme will eventually restore, will feed through to borrowers and we'll see the mortgage market operating on a more normal basis."
Defending himself against an accusation from George Mudie MP that he lacked sympathy for struggling homeowners, the governor said,
"I am not in favour of attaching political objectives to central bank operations," Mr King said.
Mr King had to field questions about whether the main measure of inflation, CPI, which the Monetary Policy Committee uses as a target for setting interest rates, accurately reflected the rising housing costs faced by homeowners.
Mr King said he said a change in how CPI was measured would be "desirable".
"I would like to see CPI include house prices in some form," he told the committee of MPs.
The measure does not currently include mortgage costs, but does include rental prices.
This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.