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"We have been taking measures on prudential risk.
The numbers of supervisory staff monitoring high-impact companies will increase, and the FSA said it will expand its prudential risk department.
RBS's board said it "acknowledges that this outcome creates a commercial and prudential risk which it must try to mitigate within the framework of a 1 1 fixed to variable compensation ratio".
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"From 2004 until the later part of 2007, the FSA was not so much the dog that did not bark as a dog barking up the wrong tree," the report said, as the regulator moved its focus from prudential risks to a new regulatory system that let banks mark their own homework – using their own models to measure risks – and implement new rules on treating customers fairly.
"It's not the risk to individual banks I'm worried about but macro-prudential risk...it is much harder to tell who is bearing what risk and where it is ending up".
The Bank – whose powers have now been bolstered to take over regulation of the banking system – defended itself by saying that at the time it had no powers to tackle macro-prudential risk and was not responsible for banking supervision and that there was not resolution authority.
Simon Hills, director for prudential capital and risk at the British Bankers Association, said: "The FSA must avoid at all costs choking off economic recovery by curtailing banks' ability to lend".
"This will confront the Bank of England with a dilemma: whether to raise base rates early, introduce further 'macro prudential' measures, or risk yet another house price boom," he said.
Substantial progress has been made in strengthening prudential oversight, improving risk management, strengthening transparency, promoting market integrity, establishing supervisory colleges, and reinforcing international cooperation.
One possibility, espoused by the outgoing treasury secretary, Hank Paulson, is to dismantle the commission and move its functions to new systemic-risk, prudential and business-conduct agencies.
Several directors argued that the sale to Prudential involved too much risk.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com