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Hector Sants, chief executive of the FSA, said what happened at the Newcastle-based lender should be considered by senior management at all financial services firms.

Speaking at the Securities and Investments Institute annual conference, Mr Sants said bosses should recognise they must take charge of making sure their business meets FSA requirements.

To take charge for their firm's regulation, he said bosses should demand relevant information and use it to mitigate these risks.

He said: "It is not enough for this risk information to remain in the hands of the specialists."

Mr Sants said in the coming year the industry could expect the FSA's supervisors to challenge senior management and boards more intensively about how they were ensuring continued compliance with regulatory principles, especially as market conditions change.

Bosses would also be quizzed on the judgements they were making and whether they reviewed the consequences of their decisions, he said.

When developing and selecting among business options, Mr Sants said the City watchdog would check whether management were giving robust consideration to the risks and the impact those risks could have if they were to crystallise.

Mr Sants said the regulator would also examine whether bosses considered the potential for new risks going forward.

He said: "Supervisors will also put more emphasis on assessing the competence of firms' senior management. You can expect to be challenged and held accountable for outcomes.

"We will not, however, prescribe the detail of how you make decisions. We recognise firms can achieve regulatory outcomes in different ways, perhaps considering methods that align well with their business models, and this is acceptable provided the required outcomes are met.

"The simple point is that you must give proper consideration to the consequences of your actions. And if our regulatory outcomes are not apparent, senior management, not the regulator, must consider how their actions need to change to get the right result."

Mr Sants said the tighter financial conditions many firms were facing meant market participants and consumers have lost some confidence in financial institutions and in the authorities' ability to safeguard the system.

Supervisory efforts have been stepped up in response, he said.

Mr Sants said: "Firms should continue to expect increased supervisory attention to their funding and liquidity arrangements and the adequacy of their stress testing. But they must also maintain sufficient focus on other important business as usual controls and regulatory priorities. We expect all firms to meet this challenge."