The Financial Services Authority gets full marks for frankness, but nothing else. The regulator of the banking industry is there to safeguard the interests of customers and the integrity of the financial system. For all its boast of light-touch regulation in principle, the FSA appears to have taken a lackadaisical approach in practice. The findings of its internal inquiry into the demise of Northern Rock could not be any more damaging to public confidence. It is not so much that the FSA took its eye off the ball; the financial referee was only occasionally at the game.

By its own admission, the senior City watchdog did not monitor Rock closely enough. Hector Sants, the chief executive, said: “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.” It failed to ask the awkward, critical questions. Its appreciation of the risks was defective. This, moreover, was an internal investigation commissioned and written by the FSA. The blunt admissions of failure may stifle calls for an independent team to look at the regulatory management of this debacle. It is hard to see how outsiders could be any more damning. Yet the scale of the FSA's shortcomings before the Rock collapse suggests that its review of its bungling would benefit from disinterested examination.

The most worrying aspect of this review is that the FSA has not discussed structural shortcomings. It claims it knows what it should do. It says it must increase the vigour of its day-to-day supervision. It must do more to test banks; improve its use of information, run more checks on banks' financial foundations and raise the quality of its analysis. Yes, it must do all of these things. But why on earth was it not doing them before?

The FSA has its work cut out re-establishing its credibilty with banks, and users of banks. It will take more than the odd scalp, and a thorough-going mea culpa, to restore the FSA to a position of comfort. It will struggle to restore its authority, and the confidence of public servants, private individuals and the financial markets.

Government must avoid knee-jerk reactions. Better regulation does not necessarily require more regulations. It does, however, require effective monitoring and enforcement of those regulations. Government has already moved to close gaps in the safety net that insures ordinary savers against the failure of a bank. But an unanswered question remains. Does the “tripartite” arrangement, where the FSA shares regulatory responsibility with the Bank of England and the Treasury, actually work? Can it regain the confidence of creditors and depositors? The Government is reinventing the system of financial regulation. It needs to consider whether the Bank should resume a greater role in overseeing the City. Alistair Darling initially signalled his enthusiasm for increasing the role of the FSA. This review will surely give him pause.

The FSA suggested yesterday that Northern Rock might have foundered whether or not it had regulated as it should have done. This is a woefully weak defence. Rock may have been wrecked in any case. The much more important observation is that it would have stood a measurably better chance of coping with crisis, and Britain would have avoided a colossal embarrassment, if it had done its job properly.