Lord Turner made the comments in reply to questions from the Treasury Committee.
The FSAâs chairman said: âEveryone was seduced by the long boom. We were often led astray in the past by complicated mathematical rules. Regulators failed to notice the inherent weakness in that position.â
However, he argued that the size of banks was also not the main reason behind the economic turmoil - smaller institutions could have been equally guilty of âover-exuberant lendingâ and ârisky short-term wholesale depositsâ.
Greater restrictions on liquidity and capital and the introduction of âcounter cyclical macro-prudential toolsâ would have more impact on increasing the stability of the banking industry rather than breaking up the bigger banks, he advised.
Lord Turner also explained that the cost to the public of bailing out the financial services industry during the global financial crisis may well be relatively small.
âIt is quite possible that the total overt costs of the UKâs big bank rescues may not exceed five-ten per cent of GDP, and perhaps considerably less as indeed was the case in the Swedish banking crisis of the 1990s.â
The FSA recently unveiled a new set of enforcement penalties which could see an organistion forfeiting up to 20 per cent of revenue for breaking its rules.
By Jim Ottewill