Northern Rock had not been subjected to a thorough supervisory healthcheck for 18 months when it imploded in August, the City’s main regulator admitted to Parliament yesterday.

During two hours of tough questioning by MPs on the Commons Treasury Committee, representatives of the Financial Services Authority (FSA) conceded that it had incorrectly assessed the risk in Northern Rock and admitted that damage had been done to the financial system under its watch.

To derision from MPs, the FSA insisted, however, that the Tripartite Committee arrangements between itself, the Bank of England and the Treasury for handling the crisis had worked well.

Increasingly hostile questions were put to Sir Callum McCarthy, the FSA chairman, and Hector Sants, the FSA chief executive, as they were perceived as sidestepping MPs’ inquiries into Britain’s first bank run in 140 years.

Sir Callum admitted that there were differences between the Bank and the FSA on the need for early injection of emergency liquidity into Northern Rock.

He said that he disagreed with the Bank on “the balance between moral hazard arrangements and equally the important duty of making sure that when there is a liquidity problem there are means of dealing with it”. Sir Callum added: “It is possible to hold different views.”

Mr Sants said that the run on Northern Rock might have been prevented if the Bank of England had pumped fresh liquidity into the bank earlier.

In a briefing paper given to MPs before the session, the FSA said that the last full risk assessment of Northern Rock bank had been carried out between December 2005 and February 2006.

Since then, FSA staff had paid visits to the company once every two to three months to review particular aspects of its operations, including its arrangement for managing credit and liquidity risk. Most of the work was done by two or three case officers.

However, a full risk assessment of Northern Rock, known as an “Arrow” review, was carried out only once every three years. Mr Sants told MPs that in the case of Northern Rock, three years had proved too long.

He also conceded that the stress-testing conducted by Northern Rock and other banks to ensure that they could withstand adverse market movements had not been done with sufficiently extreme assumptions.

Sir Callum accepted that the FSA had turned out to be wrong in its assessment that Northern Rock was a low-probability risk. Mr Sants also agreed that rules on liquidity - as distinct from capital strength – needed to be revisited.

The FSA denied being slow to react to a deteriorating situation in Rock. From August 9, when the wholesale money markets completely seized up, senior FSA officials had met daily to review market conditions, it said, and a Rock project team was set up on August 16.

Sir Callum and Mr Sants argued that the delay between August 9 and August 15, when the Tripartite Committee was formally told of Rock’s difficulties, was “perfectly reasonable” and “not material”.

MPs continued to question the role of Sir John Gieve, Deputy Governor of the Bank and on the FSA board, who was the senior link between the two organisations. MPs criticised him at a committee meeting two weeks ago.

Sir John missed two of the four FSA board risk committee meetings last year and MPs yesterday called for details of all risk committee meetings that he failed to attend since April 2006. MPs also demanded that Sir Callum investigate whether FSA officials had briefed the media against the Bank of England in September, something that Sir Callum said he had no knowledge of.

Sir Callum conceded that Rock’s business model was “extreme” in its reliance on securitisation for funding, but said that the credit crunch that hit financial markets in August was “exceptional and unprecedented”.

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