BERLIN (Reuters) – British financial reforms must target unsustainable lending practices but ensure there is no "regulatory overreaction" that hurts parties not responsible for the crisis, Deputy Prime Minister Nick Clegg said.

Speaking in Berlin, Clegg said the coalition government of Prime Minister David Cameron accepted the need for further banking regulation, and was at pains to ensure that the right measures were taken to ward off future financial crises.

"Our analysis is . . . the principal reason why such huge problems emerged is because of overleveraged, unsustainable lending practices in the banking system," he said on Thursday after meeting German Foreign Minister Guido Westerwelle on a joint visit with British Foreign Secretary William Hague.

"That is where the focus of our political regulatory efforts should be targeted," added Clegg, who leads the Liberal Democrats, junior partners to Cameron's Conservatives.

The government wanted to "avoid a regulatory overreaction which may unwittingly penalise part of the financial services system which was not responsible" for recent problems, he said.

"We just want it targeted at the problem, and not targeted at other parts of the financial services system, which might of course answer a perfectly legitimate demand for action, but which might unwittingly not deal with the fundamental problem."

A commission would soon be set up to examine the "fundamental question" about the division between investment banking and retail banking, Clegg added.

Clegg, who briefly spoke German at the news conference, praising the weather in Berlin, said the ministers had also discussed Britain's plans for a future banking levy.