At the end of a pretty tumultuous week for Gordon Brown, Lord Burns's critique of the banks went unnoticed. But his evidence to a committee was more significant than some of the other brouhaha at the Palace of Westminster - and may yet come back to haunt Downing Street.

Burns, the former Treasury permanent secretary, criticised the banking regulation that he had - reluctantly - helped to introduce when Labour came to power in 1997.

Burns said the tripartite structure covering the Bank of England, the Treasury and the Financial Services Authority, had not properly overlapped - with the result that failed business models in British banking were not spotted. He also said the system was insufficiently transparent and in the initial stages of the crisis led to uncertainty of responsibility.

He said the tighter system of bank regulation in Spain had been far more effective in controlling dangerous expansion and regulating off balance sheet securities, the source of the much of the British banking crisis. His remarks to a Lords economic affairs committee will add to the pressure on the prime minister as he dodges to avoid being made culpable for the banking crisis.

The failures will not go away - and they were highlighted again this week by what happened at HBOS. There lack of communication between the FSA and the Treasury over repeated warnings concerning the bank.

Yet the government appointed its former chief executive Sir James Crosby to become FSA vice-chairman in 2006. He was forced to resign suddenly this Wednesday amid claims that he had been dismissive of excessive risk-taking.

The Conservatives are increasingly convinced that the flaws in the regulatory system will become the achilles heel in Brown's claim that the British recession was caused almost exclusively by the sub-prime mortgage debacle in the US - a claim he restated at a question and answer session yesterday in Coventry.

But the shadow chancellor, George Osborne, believes the trail of responsibility for this crisis is now heading inexorably to Brown's door. Nevertheless, it was fortunate for Brown that when Burns gave his evidence earlier this week, reporters were swarming elsewhere in Westminster, hearing four former bank bosses give their abject apologies for driving the Royal Bank of Scotland and HBOS into the ground.

The questioning of Burns may have been gently done, and the answers couched in the understated tones of the upper house, but nonetheless the overall effect was highly damaging to the government's defence.

In 1997 he had acted as a fraught intermediary between Brown and the Bank of England's Eddie George over the decision to strip the bank's supervisory structure. Burns wrote the memorandum of understanding between bank, Treasury and the FSA, admitting in his evidence it had been his task to try to resolve some very serious tensions over their respective responsibilities.

He argued that paradoxically in the light of recent events : "The new system had been set up on the basis of a Treasury instinct that the Bank of England was always too ready to rescue banks. This was a view that ran quite strongly through the walls of the Treasury and therefore much of the arrangements set up, and the division of responsibilities, were designed to make it just a little more difficult for the Bank to get involved in this."

Discussing the start of the credit crisis, he said: "I don't think anybody quite anticipated a system where it would be the Bank of England dragging its feet as lender of the last resort, and there was a period when I felt possibly the Treasury was not as much in charge of this process as it would have been under the old arrangements. There was a period from the beginning when they had some difficulty in using the mechanisms that had been set up."

At one point, he sounded wistful of the arrangements that had been in place before. " I look back to the world when it was just the Treasury and the Bank of England. It had been working for a very long time.

"At every level of the two organisations, people met on a very regular basis and if there were differences of opinion, a sense of accommodation was reached usually relatively quickly. Having a third member into this seems, if anything, to have slowed down the process in the early stages of cooperation."

He also criticised the lack of transparency in the new system, saying the process was obscure and adding that it would help if the minutes of the senior tripartite committee were published. He also doubted if the committee often met.

The decision to take the issue of City regulation away from the Bank, he said, meant it was hard to staff up two institutions to have the skills and the background waiting for when a crisis started to build.

Burns is neither an oracle, or a totally neutral observer. But it will be No 10's concern that as the recession unwinds, and two select committee inquiries complete their reports into British banking supervision, the issues he raised will gain ever wider currency.

If Brown could only admit some role in the emergence of the crisis, he would be in a stronger political position. But so long as he suggests a perfect regulatory system was struck down purely by a US contagion, the criticisms of authoritative figures such as Burns will ring ever louder come election time.