In a lengthy report (5MB / 542-page PDF), the regulator said that "poor decisions" made by the bank's management and board were to blame for its near failure in 2008. However, flaws in the FSA's own supervisory approach provided "insufficient challenge" to the bank.

It added that deficiencies in global liquidity regulations at the time made a crisis "much more likely" when RBS proceeded with its takeover of Dutch investment bank ABN Amro in 2007 "without appropriate heed to the risks involved".

FSA chairman Adair Turner added that major bank acquisitions should, in future, require explicit regulatory approval.

The report was commissioned after the FSA's enforcement division decided last year that it would not take any enforcement action against RBS as "there was not sufficient evidence to bring enforcement action which had a reasonable chance of success" in tribunal or court proceedings.

"The fact that no individual has been found legally responsible for the failure begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future?" Lord Turner said in a statement.

The Government injected £45.5 billion of equity capital into RBS in October 2008. That stake is now worth about £20bn, according to the report.

Lord Turner said that banks should be subject to stricter risk management requirements than other companies because the failure of banks was "a public concern, not just a concern for shareholders".

"In a market economy, companies take risks on behalf of shareholders and if they make mistakes, it is for shareholders to sanction the management and board by firing them. But banks are different, because excessive risk-taking by banks... can result in bank failure, taxpayer losses, and wider economic harm," he said.

He recommended the introduction of either a 'strict liability' approach, which would make it more likely that the failure of a bank would be followed by successful enforcement actions, or an automatic incentives-based approach with either automatic bans or major changes to remuneration to ensure that a "significant proportion" of pay would be deferred and forfeited in the event of a bank failure.

The FSA would publish a discussion paper on these options in the New Year, he said.

The report concluded that RBS's failure was the result of a combination of weaknesses in the bank's capital position, over-reliance on short-term wholesale funding and concern about the bank's underlying asset quality.

This was "subject to little fundamental analysis" by the regulator, the report said.

"The FSA operated a flawed supervisory approach which failed adequately to challenge the judgement and risk assessments of the management of RBS," Lord Turner said.

However, he added that the FSA's approach to supervision had been "radically reformed" since 2007.

"[T]he errors of judgement and execution made by RBS executive management... resulted in RBS being one of the banks which failed amid the global crisis. There were decisions for whose commercial consequences the RBS executive and Board were ultimately responsible," he said.

"The Report also reinforced the conclusion that the global capital standards applied before the crisis were severely deficient and liquidity regulation was totally inadequate. Banks across the world, including RBS, were operating on levels of capital and liquidity that were far too low.

Banks will have to carry more capital when new standards are introduced under the international banking agreement known as Basel III. Its phased introduction will begin at the start of 2013. Turner said that if these standards had been in force in 2007, RBS would have been unable to launch its bid for ABN Amro. It would also have been unable to pay dividends to its shareholders during the period of time covered by the report.

The new capital standards will require a bank like RBS to hold capital equal to at least 10.5% of its risk weighted assets in normal economic conditions. The bank's capital ratio at the end of 2007 would have been about 2% under the Basel III definition, the report said.

RBS Group Chairman Sir Philip Hampton welcomed the report. "Taxpayers should never have had to rescue RBS... The FSA's views are an important contribution to the debate on how banks should be managed and regulated in the future," he said.

"Though the banking sector and the economy as a whole continue to face uncertainty, this time around RBS faces these challenges with capital rations among the strongest amongst our peers," he said. "We have significantly improved both our liquidity position and our loan to deposit ratio. We continue to support the international regulatory reform agenda and believe we are at the leading edge of implementing required changes."