FSA should have halted RBS's ABN Amro deal - MPs

A man is seen behind the entrance door of the offices of the Financial Services Authority (FSA) in Canary Wharf, London, November 19, 2010.

LONDON (Reuters) - The Financial Services Authority should have stopped Royal Bank of Scotland's takeover of Dutch bank ABN Amro in 2007, MPs said in a report published on Friday.

Parliament's cross-party Treasury Select Committee, chaired by Andrew Tyrie, also said banks needed a regulator with the self-confidence to intervene, even if that caused short-term destabilisation.

"There is no substitute for the exercise of judgment," said Tyrie, one of the most outspoken critics of the FSA's role in RBS's demise.

The FSA is being scrapped next year to make way for a new banking supervisory unit at the Bank of England - the Prudential Regulation Authority (PRA) - and a new watchdog, the Financial Conduct Authority.

The committee said the government should include an explicit requirement for the PRA to approve major bank acquisitions and mergers in forthcoming legislation.

In its own report into RBS's failure last December, the FSA said bank takeovers should face deeper scrutiny, adding flaws in its own supervision "provided insufficient challenge" to RBS.

The committee said the FSA's failure to publish a report on the collapse of RBS until being prompted to do so by the government reflected a fundamental misunderstanding of its duty to account for its actions to the public.

Turning to the Bank, Tyrie said: "A radical improvement of the Bank's own governance is an essential part of regulatory reform".

RBS became one of the world's biggest banks thanks to a string of takeovers and aggressive expansion that saw it overstretched itself with the ABN Amro deal.

Britain pumped 45 billion pounds into the bank to keep it afloat in 2008, leaving it 82 percent state-owned. The taxpayer is currently sitting on a loss of 19 billion pounds.

(Editing by Dan Lalor)