The Government published its White Paper on reform of financial markets yesterday. In a section entitled “More effective regulation”, the document states that the Government will extend the powers and objectives of the Financial Services Authority (FSA). Given that the FSA has presided over the first run on a British bank in more than a century, most observers will find that a bleakly comic assurance.

The individual proposals in the White Paper generally make sense. Banks will be required to hold more capital as provision against future losses. Regulators will have more power to take over failing banks. There will be a code of conduct on bankers’ pay. A council for financial stability will assess risks to the financial system and not only to specific institutions. But this is still a missed opportunity to correct endemic flaws and patch up the regulatory framework.

The aim of the reforms is to provide more stringent regulation of the banks, greater protection for consumers and more competition in financial services. Nowhere in the White Paper, though, is there recognition that the structure of financial regulation and not merely the oversights of regulators contributed to the crisis.

Labour established the tripartite system of regulation in 1997, with responsibility divided among the Treasury, the Bank of England and the FSA. The FSA was not up to the job. Even before the failure of Northern Rock, the FSA was dilatory in noticing weaknesses in Equitable Life, Britain’s oldest insurer, which failed in 2000.

But the most serious problem with regulation is the framework itself. It is unwieldy and it disperses accountability. As the asset price bubble expanded, neither the Bank nor the FSA acted to stop it. The Conservatives have urged the end of the tripartite system, and a return to the Bank of England of the responsibility for supervising banks. That is right: banking supervision and monetary policy ought to be done by the same body. The financial stability council appears to be a tortuous way of postponing this obvious reversion to past practice.

New powers for the FSA include the ability to impose higher capital reserves and restrict leverage. These are sensible proposals, relying on the judgment of the regulator. Critics will regard it as too discretionary and opaque an arrangement, but it is probably the most practical way of curbing excessive pay in the banking sector. If a bank rewards irresponsible risk-taking, then the regulator can impose a higher capital requirement.

But the bigger issues of stabilising the financial system are unresolved. First, the banks took on risks that they did not understand. The business of taking deposits and making loans is the lifeblood of a market economy. If that business is endangered by banks’ trading activities, then there is a case in principle for dividing commercial from investment banking. The Government has rejected that case without addressing the problem that it is intended to remedy.

Second, the authorities allowed an expansion of credit to fuel a destructive house price bubble. Monetary policy cannot accurately target asset prices, but it makes no sense to ignore them completely. The inflation-targeting remit of the Bank of England should be revised to take account of asset prices.

Third, this financial crisis was not only a failure of regulation. It was particularly a failure of management, which focused on short-term profitability rather than the long-term stability of the institution and the system. There must be a greater sense of accountability in the boardroom.

On these questions lies the future stability of the financial system. The Government’s proposals do not answer them. Given the colossal costs of the crisis, that is a failure of leadership.