The head of Britain's City watchdog today denied that regulators could have spotted bank rate-rigging before the financial crisis, but admitted regulation was "flawed" and "dangerous" in the lead-up to the credit crunch.
Lord Adair Turner, chairman of the Financial Services Authority (FSA), said regulators made "big mistakes" and would have to share responsibility with banks for restoring trust in the battered sector.
Lord Turner said there was an ongoing debate on whether regulators "could have been more alert" to Libor fraud at the height of the crisis, but said they could not have stopped fixing of the inter-bank rate without "prohibitively expensive" supervision.
Today's speech - his second in less than a week - is another strong attack on the pre-2008 regulatory system led by the FSA and the Bank of England.
He addressed a business audience in Manchester last week in what was seen as a clear pitch to put himself forward as the next governor of the Bank when Mervyn King stands down next year.
Lord Turner's public profile has been raised in recent weeks after MP hearings into rate-rigging at Barclays revealed he had privately taken the bank's bosses to task over its approach to City rules in the run-up to the Libor scandal.
In today's speech in London, he gave a frank admission of the failings of the FSA and Bank of England before the financial crisis.
He said: "In the UK we had a dangerous institutional underlap between an inflation-targeting central bank and a rule-driven regulator, with no one responsible for assessing the big picture risks, or equipped with tools to address them."
He added the UK had a "a flawed theory of economic stability" which relied on low stable inflation to maintain stability and ignored asset booms and "totally inadequate rules on bank capital and liquidity".
Lord Turner outlined five recommendations for reforming the banking system, which included better regulation and meeting the Vickers Commission recommendations to ring-fence retail banking from investment banking.
But he said it would be "wrong and dangerous" to believe that ring-fencing alone would prevent future crises.
He also suggested free banking was partly to blame by holding back competition in the sector and leading to scandals, such as PPI miss-selling, as banks search for ways to offset losses on providing current accounts free of charge.
But the culture within banks needs to change, starting at the top, he said.
"Unless management and boards themselves shift the tone from the top in such specific ways, and in addition make effective controls against dishonest behaviour the highest priority throughout the organisation, then we are not going to change the external perception of bankers," said Lord Turner.
He added: "Rebuilding trust will be a huge challenge. Some of that challenge falls to regulatory authorities - we made big mistakes before the crisis.
"Much falls to the leadership of banks themselves. But it is a challenge that must be met, given the vital role which the banking industry plays in our market economy."