The City watchdog was last night under pressure to explain how it had monitored Dunfermline after the government unveiled a £1.6bn bail-out for the stricken Scottish building society.

Alistair Darling, chancellor, ordered the Financial Services Authority to produce a report on how the 12th biggest lending mutual in the UK had failed.

Vince Cable, Liberal Democrat spokesman, called it a 'gross failure of regulation'.

Dunfermline built up an £800m 'toxic loan book' of commercial property and UK subprime mortgage-backed securities that will now be the responsibility of taxpayers – along with £500m of less risky social housing loans and some other assets.

Financial Times