The misguided gamble of buying ABN Amro and inadequate regulation were among the reasons for the near-collapse of Royal Bank of Scotland in 2008, a report by the Financial Services Authority (FSA) said on Monday.

The long-awaited review of the case by the City watchdog blamed the failure of RBS on six factors.

These were: weak capital; over-reliance on risky short-term wholesale funding; doubts about its underlying asset quality; substantial losses in credit-trading activities; its gamble on Dutch bank ABN Amro; and the overall systemic crisis, leaving relatively weak banks vulnerable.

The FSA, which is due to be broken up next year and replaced with two new UK regulatory bodies, admits that its own supervision was 'flawed' and 'provided insufficient challenge' to RBS.

The regulator describes itself as 'too focused on conduct regulation at the time and its prudential supervision of major banks was inadequate'.

It also criticised former Prime Minister Gordon Brown for encouraging 'light touch' regulation, but said the weak capital and funding of RBS was also to blame.

Describing the political agenda at the time, the report highlights 'a sustained political emphasis on the need for the FSA to be "light touch" in its approach and mindful of London's competitive position'.

On several occasions in 2005 and 2006 Brown said he didn't want 'unnecessarily restrictive and intrusive regulation' to impair London's competitiveness.

The 452-page report said of the ABN Amro purchase: 'The decision to make a bid of this scale on the basis of limited due diligence entailed a degree of risk-taking that can reasonably be criticised as a gamble.'

It also points to 'underlying deficiencies in the RBS management, governance and culture which made it prone to make poor decisions'.

In a statement on Monday, RBS chairman Philip Hampton admitted: 'Taxpayers should never have had to rescue RBS.'

RBS came within hours of collapse in October 2008 and was only saved by a £45.5 billion taxpayer bailout, which led to the UK government owning 83 per cent of the ailing bank.

Its £49 billion buyout of ABN Amro at the height of the financial crisis in 2007 was the latest acquisition in a decade-long spree led by former chief executive Fred Goodwin, who depleted the bank's capital.

The bank has since cut 27,500 jobs and last month reported pre-tax profits of £2 billion in the three months to 30 September, compared with a £1.6 billion loss in the same period last year.

However, it warned of further job losses and said the global economic slowdown was delaying its recovery.

In an article for the Daily Telegraph on Monday, Hampton described the change programme at RBS as huge.

'We have aggressively reduced the bank's exposures, substantially reducing a balance sheet that was once the world's biggest. We have fundamentally changed the way we pay our staff. Bonuses are not only smaller, but linked to the long-term strategy of the bank as they always should have been in the past.'

He said the bank is 'greatly changed from the one he walked into three years ago', adding: 'Our leadership is new, with all senior executives who were responsible for the bank's crisis no longer in the company. We are safer and stronger with capital and liquidity levels among the strongest in Europe.'

Current shareholders do not appear to be completely convinced as the stock dropped during trading on Monday.

Looking ahead, any major bank takeovers are expected to need independent advice and explicit consent from the regulator. There could also be new rules to ensure executives and directors face personal financial consequences if a bank fails.

Under the new global Basel III definition of capital, RBS would have had a common equity Tier 1 ratio of 2 per cent, compared to a requirement for large and complex banks to hold 9.5 per cent under new rules coming in.

The FSA said it had already become more intrusive and global changes have already addressed many of the problems. It has 23 people now supervising RBS, compared to six in August 2007.

Meanwhile, the taxpayer is sitting on a £25 billion paper loss on its 'investment', and appears unlikely to be able to start selling shares any time soon.

This was written for our sister website, Interactive Investor