The Financial Services Authority was praised yesterday for coming clean about its own failings in supervising Northern Rock.
These included an astonishing confession that the doomed Rock was unique among the 38 banks regulated by the City watchdog - deemed to be in no need of a "risk mitigation programme".
It was also one of only four banks cleared as "low risk" by the FSA and so requiring a risk assessment every three years only instead of at the usual two-year intervals.
"We welcome the fact that the FSA has conducted a very thorough review and is taking action as appropriate," Prime Minister Gordon Brown told the Commons.
He denied that the tripartite system sharing regulation between the Treasury, the Bank of England and the FSA, set up by himself as Chancellor, had been found wanting.
The Financial Services Consumer Panel congratulated the FSA for acknowledging its shortcomings, but said independent auditors could have lent its internal review a valuable wider perspective.
The panel's chairman, John Howard, commented: "The events surrounding the failure of Northern Rock, including the sudden collapse in credit markets, were testing the limits of regulation anyway.
"No regulator can guarantee to prevent all failures. In these circumstances a realistic compensation scheme which pays out quickly is vital to prevent another bank run."
Hector Stants, the FSA's chief executive, stressed that the FSA was not seeking to establish a "no failure" regime in the tripartite authority's new system.
"Our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome is hard to judge," Mr Sants said.
"Demonstrating our willingness to examine ourselves critically and learn lessons is central to giving the financial services industry and consumers' confidence in the FSA, although, like any organisation, we cannot and do not claim infallibility, and we cannot, and should not, attempt to remove all risk from the system."
A summary of the report revealed that the FSA undertook no detailed financial analysis of Northern Rock which might have highlighted the extent to which it relied on the wholesale money markets to fund its mortgages.
Nor did the FSA pick up the risks involved in the rapid expansion of Northern Rock's lending in 2006 and 2007.
The FSA's review concluded that "overall the supervision of Northern Rock was at the extreme end of the spectrum within the firms reviewed in respect of these failings and that its supervision did not reflect the general practice of supervision of high-impact firms at the FSA".
The regulator is now undertaking a "supervisory enhancement programme", including a new group of specialists to keep an eye on the supervision of all "high-impact" firms - and there will be "more focus" on their liquidity.
There will be more supervisors, with a mandated minimum staff level overseeing each firm. The FSA's senior managers will be more involved, too.
The existing prudential risk department will be expanded and the "training and competency framework" will be upgraded.