Analysis: What an appalling mess – and Lord Turner may have pressed the ejector button that could catapult Gordon Brown out of Number 10

That was the admission yesterday from Lord Adair Turner, head of the Financial Services Authority. He said the regulatory agency did not concentrate enough on the excessive risks taken by banks.

"We didn't focus enough on that," he said, referring to the fact that by 2004 "the whole system was risky".

Late though it is, Lord Turner has put his finger on a central failing that links the individual stories of our banking crisis. And in doing so, he may well have pressed the ejector button that could catapult Gordon Brown out of Number 10.

Lord Turner's comments came barely two days after the FSA revealed its staff and senior executives were in line for up to 33 million of bonuses.

And that, in turn, came just a day after Sir James Crosby, the FSA's deputy chairman, resigned after allegations from HBOS whistleblower Paul Moore that the bank sidelined his warnings over excessive risk.

Lord Turner stressed that the decision to appoint Mr Crosby had been the Treasury's.

And on Lloyds, Lord Turner said: "The losses that have been revealed this week are not huge surprises to the FSA." He said the authority had predicted such losses when carrying out "stress-testing" in October.

What an appalling, blame-dodging, question-begging mess is now unfolding with new items almost every day.

Bankers with no banking qualifications; top executives who say they were not to blame; a regulatory system almost perfectly designed to miss the big picture; bonuses showered everywhere – and a government in denial of its responsibility.

Gordon Brown now looks vulnerable on four fronts.

First, he was the architect of the current tripartite regulatory system, set up in one of his first acts as Chancellor. The FSA was charged with supervising the banks, the Treasury was responsible for legislation and the Bank of England for financial stability. But from the start, the FSA's role was ambiguous and confused.

Many looked to it as a consumer protection body. And indeed, it spent enormous time on the micro-regulation of the financial sector – in particular the marketing and selling of financial products.

Hundreds of small independent financial advisory firms disappeared under volumes of conduct of business rules, driven into the arms of the bancassurance giants such as HBOS.

This torrent was finally abandoned two years ago when a principles-based system took over from the Domesday Book of thousands of petty rules. But the bigger picture of the credit and house price boom seemed to elude the FSA.

Second, it was Mr Brown as chancellor who made appointments to the FSA.

Third, it was Mr Brown as Chancellor who made appointments to the Bank of England's Monetary Policy Committee and who ordered the Bank to set interest rates using the EU-standard Consumer Price Index as its inflation measure.

The central flaw of the CPI is that it has no house price component. As a result, interest rates were cut and kept low even though house prices and mortgage lending boomed.

And fourth, it was Mr Brown, together with his Chancellor, Alistair Darling, who promoted the Lloyds TSB takeover of HBOS by waiving competition rules.

A key point the Treasury must now explain in the light of Lord Turner's admission that the FSA knew about the 10 billion of HBOS losses last October is whether this information was known to Lloyds – and why was it not given to the market?

Lord Turner may well have handed Lloyds shareholders the killer ammunition for a class action suit.

Throughout the lending and house price explosion, Mr Brown as Chancellor talked the language of prudence while riding the credit tiger. The boom brought in huge revenues to the Treasury through corporation tax on bank profits and soaring gains from stamp duty (up from 7.7 billion in 2002-3 to 13.8 billion in 2007-8).

Lord Turner's review of financial sector regulation will be published on 18 March. He said it would bring about "very major changes" to the way banks are regulated.

Quite so. But the biggest changes needed are at the top.