The Confederation of British Industry has this evening launched a condemnation of the way the bank of England handled the Northern Rock crisis.

CBI director-general Richard Lambert attacked the banking regulation system, set up when the Bank of England was granted its independence in 1997, at a speech to business leaders at the CBI North East annual dinner in Newcastle.

The system involves the Financial Services Authority, which supervises individual banks; the Bank of England, which deals with systemic crises and provide funding; and the Treasury, which can provide public funding to keep institutions in business in an emergency.

Mr Lambert said the problems at Northern Rock, which resulted in a run on the bank after it was forced to turn to the Bank of England as lender of last resort less than two week ago, represented the first big test of the so-called tripartite arrangement.

"For whatever reason, this tripartite system has failed to deliver the goods," he said.

Perhaps there are just too many conflicts inherent in a system where three different institutions, with three different policy priorities, have come together to tackle a fast-moving crisis.

He said that the run on Northern Rock was "what you would expect in a banana republic", adding that one should have happened in a mature and prosperous country like the UK is almost unimaginable.

Despite his criticisms, Mr Lambert did emphasise that the board of Northern Rock had to take full responsibility for the banks business model, which left it more dependent on money markets for its finance than other institutions.

Other financial institutions around the world have been buffeted around in this rough weather. Few of them have been holed.

He said there were now two ways to restore normality to the UKs banking system.

"Firstly, the government could underwrite bank savings - which would involve high levels of regulation and kill competition and innovation in the industry.

"But the CBI's preferred route would be to return to a world where market forces operate."

However, he cautioned that returning to this world would involve careful analysis of the strengths and weaknesses of the tripartite system combined with a return to a coherent system of banking supervision.