Bank of England Governor Mervyn King has called for a legislative overhaul to help prevent a repeat of the Northern Rock banking crisis.
In evidence to MPs on the Treasury select committee the Governor, who has come under pressure over his handling of the crisis, said he had pressed for a "covert" rescue of the Newcastle-based bank to prevent the queues of panicked savers.
But he said the Bank was prevented from launching a secret rescue of the mortgage lender by market abuse regulations and City takeover rules.
He added that current rules, which fully guarantee only the first £2,000 of savings and freeze deposits in the event of a bank failure, added to the panic among Northern Rock's customers, which was only averted by the Government's cast-iron assurances over all savings.
Mr King urged politicians of all parties to work together on a "serious reform" of the existing system.
He said: "The interaction between different pieces of legislation made it almost impossible to act as a lender of last resort."
Shadow chancellor George Osborne has written to Chancellor Alistair Darling offering the co-operation of Conservative MPs in implementing as "an urgent priority" the changes to legislation proposed by Mr King.
Liberal Democrat Treasury spokesman Vince Cable said: "Mervyn King should not be blamed for inheriting a flawed system of bank supervision designed by the current Prime Minister and which he is endeavouring to operate properly."
But the Governor also faced down criticism that he acted too slowly to bail out Northern Rock, saying that moving too early would have been "irresponsible".
He told MPs that an early injection of funds into the money markets where Northern Rock raised most of its cash for mortgage lending would have "sent a signal that the UK authorities were concerned about the banking system".
