MPs blame regulator's failures for run on Northern Rock bank

Gordon Brown faces a fresh blow today over the Northern Rock debacle with a Labour-led committee of MPs reporting that failures in the financial services regulatory body caused the run on the bank.

The Treasury Select Committee said the framework for handling a financial crisis – put in place by Mr Brown when he made the Bank of England independent in 1997 – is fundamentally flawed, and it blamed the Financial Services Authority (FSA), the banking system's public watchdog, for "a substantial failure of regulation".

Calling for a shake-up of the tripartite structure of the FSA, the Treasury and the Bank of England, MPs said the system lacks clear leadership and that its failings were exposed when Northern Rock suffered the first run on an English bank since the Victorian age.

The MPs urged the creation of a deposit protection fund to avoid any repetition of the chaos which ensued when savers were left queuing to withdraw their money.

The Prime Minister, who returned from the World Economic Forum in Davos last night, has called a summit of European leaders on Tuesday in London to coordinate action to avert future banking failures.

He will host the summit with Angela Merkel, the German Chancellor, Nicolas Sarkozy, the French President, Jose Manuel Barroso, the president of the European Commission, and the Italian Prime Minister, Romano Prodi.

Next week, the Chancellor, Alistair Darling, will unveil an emergency package of UK legislation to enforce openness and tougher regulation, and it may make a bank's takeover easier if it gets into difficulty.

Vince Cable, the Liberal Democrat Treasury spokesman, said: "The run on Northern Rock was not only a failure of the bank, but also a failure of regulation. 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."

The select committee, in its report, supported the Government's rescue plan, but pointed out that the bank could still be nationalised. The MPs heaped most blame on the bank's directors, who pursued a "reckless business model", and said the FSA failed in its regulatory duty to ensure that Northern Rock would not pose a systemic risk.

They said Adam Applegarth, the bank's chief executive until December, had admitted that he was not a qualified banker and the MPs called on the FSA to run checks on bank chiefs to make sure they were qualified. They also recommended the creation of a new post of deputy governor of the Bank of England and head of financial stability.