A cross-party committee of MPs yesterday called for a new office to monitor British banks, saying that the Financial Services Authority should not be permitted any additional powers.

The Commons Treasury Select Committee’s report on the Northern Rock scandal said that the City regulator has “systematically failed in its duty” to oversee the troubled bank’s activities. “The FSA did not supervise Northern Rock properly,” the report said. “The failure of Northern Rock, while a failure of its own board, was also a failure of its regulator.”

The 183-page report will sour the exit of Sir Callum McCarthy, who is due to step down as chairman of the FSA in September. It recommends that a Bank of England deputy governor and head of financial stability be introduced to oversee a new protection scheme for bank deposits, keep a look out for banking problems and oversee the rescue or “orderly failure” of troubled banks.

To encourage “creative tension” in the system of financial regulation, the FSA should not be given responsibility for these new powers, the MPs said. Instead, the new deputy governor will have a staff of people seconded from the Bank and the FSA and may take a seat on the Bank’s Monetary Policy Committee, the report recommended. He or she will be responsible for keeping the Chancellor informed of developments in financial crises.

Alistair Darling, top executives from the regulator and the Bank, and Northern Rock’s management were dragged into nine hearings by the committee since the bank came close to collapse last September. The report based on these hearings will prove an embarrassment for Sir John Gieve, the Bank Deputy Governor who was accused by the committee last year of being “asleep in the back shop” while the Rock teetered on the brink.

The FSA admitted again yesterday that there had been clear supervisory failings in its dealings with Northern Rock. The regulator will publish the conclusions of a review of its activities in March.

The Commons committee also accused the Tripartite authorities – the Chancellor, the FSA and the Bank of England – of being too slow to finalise the Rock’s emergency government loan and of dithering over the announcement of a guarantee to protect the bank’s customers. “The Tripartite authorities and Northern Rock ought to have strained every sinew to finalise the support operation and announce it within hours rather than days,” the report said. “There was no sign of a communications strategy of the Tripartite authorities during the crisis of September 2007.”

MPs said that Britain’s central bank had been too concerned about the implications of assisting Northern Rock and should have been more proactive in the liquidity crisis. It would have been a “better deal for the taxpayer” if the Tripartite had helped Lloyds TSB to buy Northern Rock last August rather than allowing the bank to borrow £25 billion in public funds, the report said.

Northern Rock’s board was also criticised. The committee described the bank’s business strategy as “high risk and reckless” and called for the FSA to conduct an urgent review into qualifications of senior directors of financial firms, after learning that neither Rock’s chairman nor its chief executive had any training for their roles.

Under the terms of the new deposit protection scheme, UK banks would be forced to pay in money up front, rather than waiting for a crisis to develop as happens under the current Financial Services Compensation Scheme rules. The new scheme must be able to return bank customers’ cash to them within days of a bank collapsing, rather than the months or years that some must wait under the current system, the MPs said.

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