Leveling fresh criticism at the way banks were supervised by the Treasury, Bank of England and Financial Services Authority, a report published by the influential House of Lords Economic Affairs Committee said the so-called tripartite system had failed and must be reformed. In particular, the report said the problem was that it was not clear who would be in charge in a crisis. It said the Bank of England should get a clear executive role.

Commenting, Lord Vallance, the Committee's chairman, says how it is also “clear that in the UK the tripartite authorities of the Bank of England, FSA, and the Treasury failed to maintain financial stability, in part because it was not clear who was in charge in a crisis and because not enough attention was paid to macro-prudential supervision - oversight of the aggregate effect of the actions of individual banks - in the period when "boom and bust" was mistakenly assigned to history.”

The Committee have been looking at the regulation and supervision of the banking sector and whether failings in this area contributed to the banking and financial crises in the UK. Highlighting the system’s defects, which led to the failure of Northern Rock, the Committee says it believes changes should be made as soon as possible to the regulatory framework and its scope. The Lords' findings mirror the report of the House of Commons Treasury Committee, which said that the tripartite financial authorities had been insufficiently prepared to deal with Northern Rock's difficulties and needed to communicate better with each other.

"Without a clear executive role, the Bank can do no more than talk about financial stability. This exposes it to reputational risk without generating any clear benefit," the Lords' report said. It recommended taking the responsibility for supervising the banking system as a whole away from the FSA and giving it to the Bank of England.

The Lords also called for the authorities to be given more power over foreign banks operating in the UK. "The degree of control that our supervisors and regulators here in the UK have over bank branches of foreign banks is very limited," Lord Vallance said. "If there is a crisis then the money tends to rush back to the home of the bank itself leaving the problem with the UK taxpayer."

The Committee also recommends that in future regulators should focus more closely on the risk models used by banks, concluding that prior to the financial crisis, banks were using short term risk models which relied too heavily on recent financial data. With limited data, towards the end of any period of economic boom risk models paint a rosy picture which can lead to speculative bubbles. The report recommends that regulators should rigorously question the assumptions in banks' risk assessment models, insist that they calibrate their models over long periods and submit risk models to regular stress tests.