THE Financial Services Authority is to be applauded for publishing its own internal report into the Northern Rock debacle.

Sadly, as the report shows, this was probably the first sensible decision it has taken since the crisis began.

Certainly, the FSA's stewardship of the British financial system has been found seriously wanting.

It had too few regulators to monitor Northern Rock, no one had met the bank's managers since January 2005 and it was initially supervised by a department responsible for insurers, not banks.

Not only did the FSA fail to spot the warning signs, but it took a blase view of the likelihood of a credit crunch bringing the banking system to a standstill. Such a probability was classed as a "low probability, high impact risk".

In other words, the FSA thought it would never happen. The authority believed credit would continue to flow because it hadn't ever dried up before.

This seems an incredible situation for the City watchdog to find itself in.

The role of a watchdog is to oversee the financial system and plan for every eventuality.

Instead, the FSA took its eye off the ball at the worst possible moment and thousands of Northern Rock shareholdders are now set to pay the price.

More worrying for the country as a whole is the damage this has done to Britain's reputation as a "safe place to do business".

The word "credit" derives from the Latin credo, which means "I believe".

Money markets across the world are based on faith. The faith that a borrower will pay back a loan, faith that a bank won't find itself with no money and faith that a regulator has a firm grip in the event of a crisis.

Eventually, it was a lack of faith as much as the lack of credit, which did for Northern Rock.

We continue to have faith that the FSA can learn from this report and carry on.

But faith needs to be repaid - it can afford no more mistakes on the scale of Northern Rock.