British authorities could have prevented the run on Northern Rock by having a formal system in place to protect depositors, the City's top watchdog, the Financial Services Authority (FSA), claimed today.

Callum McCarthy, the FSA's chairman, told MPs that a US-style scheme that guaranteed savers' funds could have helped to shore up confidence in the stricken mortgage lender and possibly called a halt to the first run on a bank in the UK for 141 years.

Speaking before the powerful Treasury Select Committee, Mr McCarthy said that formal depositor protection "undoubtedly could have been a real help in preventing the retail run".

The cross-party committee is looking into the UK’s financial stability and has already quizzed other members of the FSA and fellow representatives of the 'tripartite authorities' at the Bank of England and the Treasury.

Rock management, including the departing chief executive Adam Applegarth, have also been grilled by the MPs.

Northern Rock sparked the run when it revealed its approach to to the Bank of England for emergency funding after being refused loans in the wholesale markets.

Alistair Darling, the Chancellor of the Exchequor, has offered total protection for all Rock depositors. But at other banks, only the first £35,000 of deposits have a full guarantee.

Hector Sants, the new chief executive of the FSA, defended the tripartite system, which divides responsibilities between the FSA, the Treasury and the Bank of England.

“I don’t think the philosophy of regulation is undermined,” Mr Sants said. He added that “there may well be questions... about the particular engagement [with the bank]."

Rock shares fell more than 4.5 per cent today, down 5p at 104.5p, ahead of a quarterly review by the organisers of the FTSE 100 that is likely to see it ejected from the blue-chip index on size grounds.

The bank's board, backed by the tripartite authorities, has named Sir Richard Branson's Virgin Group as its preferred buyer, but is facing increasingly strong competition from a rival team led by Luqman Arnold, the former chief executive of Abbey National.

Mr Sants told MPs that there was no evidence to suggest that a different division of responsibilities between the FSA, Bank and Treasury would have improved the situation.

“As for the question of whether it would have made any difference if, administratively, the supervisors had reported to the Bank rather than the FSA, I don’t think there’s evidence at all,” he said.

Mr McCarthy played down the prospect of nationalising the Tyneside lender, saying the two proposals on the table should be taken as far as they can go first.

“It is better to see if [Virgin and Olivant] can be advanced before looking at nationalisation,” he said.

Vince Cable, the interim leader of the Liberal Democrats, has called for the Rock to be nationalised. David Cameron, the leader of the Conservatives and the official opposition, said that nationalising the bank would represent a "monumental failure".

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