Chancellor and City watchdog are blamed for Northern Rock fiasco

The Financial Services Authority (FSA) committed a "systematic failure of duty", the Treasury Select Committee report concluded.

It also blamed Alastair Darling, the chancellor, and the Bank of England for not acting quickly enough to stop the run on the bank by panicked customers last September.

The committee has now demanded a radical overhaul of the FSA, which will make uncomfortable reading for Gordon Brown, the Prime Minister, who as chancellor was the architect of the regulatory framework.

Last night George Osborne, the shadow chancellor, said the report left Mr Darling's credibility "in shreds" after "yet more evidence of damaging dithering".

And Vince Cable, the Liberal Democrats' Treasury spokesman said: "Northern Rock's managers behaved like a bunch of cowboys and the FSA did nothing to rein them in, or even appear to see there was a problem."

Northern Rock, based in Newcastle, owes the Bank of England about 24 billion after soaring borrowing costs forced it to seek a funding bail-out. The leaking of that news on 13 September triggered a rash of withdrawals, with savers queuing outside branches for their cash.

The 183-page select committee report concluded that a four-day delay before an announcement from the Chancellor guaranteeing customer deposits "prolonged" the run on the bank. This was "more damaging to the health of the company than might otherwise have been the case", the MPs said.

The committee said the Treasury, the Bank of England and the FSA decided to announce funding for the bank two weeks after it had been agreed in principle by the Chancellor and a week after emergency funding was deemed necessary. The loan should have been announced within hours of the Chancellor's decision, the committee said.

The FSA did not act until the credit crunch had gripped money markets in early August and Northern Rock's "stress-testing" of its business model – relying on wholesale lending rather than deposits to fuel its business – was inadequate, the MPs said.

John McFall, the committee's chairman, said: "The failure of Northern Rock, while primarily a failure of its directors, was also a failure of its regulator.

"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."

He added: "The FSA did not supervise Northern Rock properly. Its procedures were inadequate to supervise a bank whose business grew so rapidly."

The MPs called for better communications to prevent panic and a beefed-up role of Bank of England deputy governor and head of financial stability – backed by staff from the Treasury and the FSA – to act as the main adviser to the Chancellor on potential crises.

The report said the holder of the role "should have credibility in the financial markets". This will be seen as a blow to the current deputy governor, Sir John Gieve, a career civil servant, who was condemned by the committee for being "asleep in the back shop" last year.

Mervyn King, the governor of the Bank of England, also drew criticism from MPs for failing to act in August while the European Central Bank shifted funding forward in an attempt to unfreeze credit markets.

But the report said the principal authors of the difficulties were the Northern Rock directors, who have since quit.

MAIN PLAYERS IN BANK CONTROVERSY

ALISTAIR DARLING

THE CHANCELLOR'S delay in announcing the guarantee for Northern Rock savers was blamed for fuelling the first run on a UK bank since Victorian times. The delay "prolonged" the run and made it more damaging.

SIR JOHN GIEVE

THE Deputy Governor of the Bank of England has been criticised for not spotting and anticipating the potential problems that were likely to befall the bank due to the credit crunch in money markets.

CALLUM McCARTHY

THE FSA chairman has also been implicated, as the Treasury Committee said there had been a "systematic failure" by the regulator. The FSA did not supervise the bank properly, or provide sufficient resources to monitor it.