The Financial Services Authority (FSA) is to hold a six-week exercise to test the resilience of the UK's financial institutions to an avian flu pandemic.
Mr McCarthy said the industry could ignore the issue at its peril
Starting on 13 October, some 60 banks, insurance firms and other financial businesses will take part.
The exercise will look at a number of factors including how firms could cope with a greatly reduced workforce.
It was announced by FSA chairman Callum McCarthy in a speech at the Mansion House in the City of London.
Mr McCarthy said that government departments, health agencies and other experts were also involved in the simulation.
"I am confident that we will all learn much from this test - as we need to do," he said.
"It is an area we would neglect at our peril, and we are determined not to allow this to happen."
The announcement of the avian flu exercise came as Mr McCarthy said the UK's financial services industry remained in good shape, but should never be complacent about possible economic downturns over the horizon.