Chancellor Alistair Darling says the UK economy is strong enough to "carry us through... an unparalleled period of financial uncertainty".
He spoke after the boss of the world's biggest bank, Citigroup, became the latest casualty of the credit crisis.
There were concerns about how exposed banks were to bad debts, but it should be kept "in perspective", he said.
Years of big profits had left UK banks with "very strong balance sheets", and the economy was still growing, he said.
Mr Darling told BBC Radio 4's Today programme he expected banks to be more "cautious" in their lending in the wake of the global credit crunch, which was sparked by huge bad debts in the US sub-prime housing market.
He claimed that it was "no bad thing" if institutions were to be less cavalier about giving out money, adding that he had already taken into account the impact of the crisis by revising down his growth forecast.
"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 the future," he said.
SUB-PRIME CRISIS EXPLAINED
Sub-prime loans are offered to those with inferior credit records or unpredictable earnings.
The debt has been repackaged and sold around the world.
Rising interest rates trigger record defaults, casting doubts on the value of the debt.
"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."
Asked about the impact of the credit crisis on the UK economy, he said: "Despite this international uncertainty, which started from the problems in the US housing market, there are grounds for believing that we will get through this.
"We have a strong economy, its momentum will carry us through."
Mr Darling also defended the billions of pounds lent to Northern Rock, saying the bank still had assets of £100bn.
Chairman and chief executive of Citigroup, Charles Prince, said his resignation "was the only honourable course" after the world's biggest bank built up billions in losses and write-downs from exposure to high-risk mortgage debts.
After Mr Prince stepped down, Citigroup revealed that it was facing losses of between $8bn and $11bn in previously undisclosed losses due to a decrease in the value of its $55bn portfolio of sub-prime loans.