Britain's financial watchdog failed in its duty to regulate Northern Rock and a new office should be set up to intervene in failing banks, a committee of influential legislators said today.
The Bank of England should oversee the new post rather than the Financial Services Authority (FSA), the Commons Treasury Select Committee said in a damning report.
"The failure of Northern Rock, while primarily a failure of its directors, was also a failure of its regulator," said John McFall, chairman of the all-party committee of politicians, in a statement.
"The FSA appears to have systematically failed in its duty and this failure contributed significantly to the difficulties and risks to the public purse that have followed," said McFall, a member of the ruling Labour party.
The committee recommended a "radical shake-up" at the FSA and the Bank of England, both "found wanting with regard to financial stability", though it censured the FSA more harshly.
The report is the most comprehensive into the Northern Rock crisis which erupted mid-September when the lender failed to raise money in financial markets. It sparked the first run on deposits of a major British bank for more than 140 years.
The recommendations call into question finance minister Alistair Darling's plans to give the FSA power to seize and protect depositors' cash when a bank gets into serious trouble and then oversee its recovery.
The committee recommends giving a single authority new powers for handling failing banks and responsibility for a new deposit protection fund, but not under the FSA.
A new office of deputy governor of the Bank of England and head of financial stability should be set up to advise the finance minister and reform the tripartite system of regulation.
The system, where the Treasury, Bank of England and the FSA share responsibility for regulation, has attracted criticism during the Northern Rock crisis.
The Committee said there had been inadequate communication.
It said the finance ministry was right to have authorised financial support but the tripartite authorities "did not prepare adequately for that support operation" and should have finalised its plans within hours of the decision to help.
Northern Rock has borrowed about £25 billion pounds ($49 billion) in emergency loans and the government has backed plans to convert the debt into bonds, which can be used by potential rescuers of the bank. The deadline for offers is February 4th.