Britain's banking regulators today admitted that some aspects of their supervision of Northern Rock were 'inadequate' and that the effects of the Newcastle firm's crisis had been damaging to the UK.

Sir Callum McCarthy, chairman of the Financial Services Authority, and its chief executive Hector Sants were today grilled by MPs over their handling of the bank's problems.

Before the House of Commons Treasury Committee they recognised 'the great inconvenience and anxiety which Northern Rock's problems have caused for its customers, and the wide public concern and loss of consumer confidence occasioned by the unprecedented events of recent months.'

They also admitted that 'despite the government's safeguards for depositors, we are clear that what has occurred has been damaging. This is despite the fact that all depositors who have reclaimed deposits have been paid in full.

'As the regulator with a statutory duty to maintain market confidence and provide appropriate protection to consumers, the FSA needs to identify what lessons to learn, and what improvements to make.'

Sir Callum and Sants came under sustained pressure from the all-party group's Labour chairman John McFall and its Tory deputy, former Darlington MP Michael Fallon.

The latter demanded to know why, despite a growing knowledge of Northern Rock's problems, it had not been subject to a full supervisory review since February 2006 and when the next was due.

Sants said: 'The next review was due three years after the one before. In my view, that is inadequate.'

Sants also revealed that just three of the FSA's more than 2000 staff were permanently attached to looking after the Newcastle bank - but he said that other teams regularly went to Northern Rock as part of an intensive supervision regime of what was considered to be a 'high impact' financial institution.

Fallon demanded to know why if the FSA had known for two years that Northern Rock's dependence on loans from other banks made its business model 'extreme' and nothing had been done to prevent the crisis.

Sants said the combination of circumstances where wholesale lending between banks caused by problems in the American mortgage market, and the leaking of the Newcastle firm's application for emergency a Bank of England loan, were unprecedented and could not have been foreseen.

Sir Callum said that it would have been impossible both legally and practically to provide the Bank of England cash in secret and that had news of the loan not caused a run on the bank, the crisis would have been averted and the perfectly reasonable request for financial support might never have been needed to be used.

McFall accused the FSA of failing to treat Northern Rock with the same seriousness as other bigger banks, something that Sir Callum denied.

But he and Sants admitted that major changes needed to be made to the supervision of big banks in the wake of the Northern Rock crisis, and promised lessons would be learned.