US President Barack Obama has proposed curbing the size of banks, preventing key financial institutions from owning hedge funds and barring them from proprietary trading - investing to make a profit for themselves rather than on behalf of customers.
Bankers in Davos were less than pleased with the ideas.
Earlier on Wednesday, Barclays boss Bob Diamond said he had "seen no evidence ... to suggest that shrinking banks and making banks smaller and narrower is the answer."
Other bankers, like Jacob Frenkel of JPMorgan Chase, have said they were worried about "bad regulation".
Mr Sarkozy told the delegation - to scattered applause - that governments and companies in the world economy could not pretend it was business as usual.
"We are not asking ourselves what we will replace capitalism with, but what kind of capitalism we want?" he said.
"We must re-engineer capitalism to restore its moral dimension, its conscience," he said. "By placing free trade above all else, what we have is a weakening of democracy.
While saying that those who ran companies that made money deserved to be compensated well, Mr Sarkozy hit out at huge bank bonuses that have caused public outcry in the US and UK.
"There are remuneration packages that will no longer be tolerated because they bear no relation to merit," he said.
Earlier in Davos, legendary investor George Soros backed Mr Obama's proposed reforms to limit the size of banks and told journalists that Wall Street bankers who opposed the plans were "tone-deaf".
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