A report by MPs on the Treasury Select Committee slammed the Financial Services Authority (FSA) for the part it played in the failure of RBS, which saw the taxpayer stump up £45.5 billion to prevent it from collapse.
The committee said the FSA's biggest fault was not intervening to stop the "calamitous" near-£50 billion ABN takeover and is urging the Government to legislate to ensure the regulator is explicitly required to approve major bank acquisitions to prevent a repeat of the fateful deal.
But the FSA comes under widespread criticism in the report - made into the FSA's own report into the collapse of RBS - saying its failures in the saga "amount to a serious indictment" of bosses at both the bank and the regulator.
The committee also hit out at the FSA for needing to be strong-armed into producing a report into RBS, which was published last December.
The FSA originally decided not to produce a report into the RBS collapse until bowing to Parliamentary pressure.
But the committee found the FSA's report did give a fair picture of events surrounding the bank failure and subsequent bailout.
An FSA spokesman said the regulator would "consider the report's findings and recommendations in detail", adding the FSA had put in place "a completely new model of supervision since the financial crisis".
Today's report said the FSA's inaction throughout the RBS takeover of ABN "reflects a grave weakness in the corporate governance of the FSA".
The FSA did not previously have the power to approve the ABN deal, because it was a takeover of a Dutch bank - but there also was no explicit requirement to give approval even for a deal involving two UK banks.
But the committee's report said: "It should have intervened at an early stage.
"It should and could have intervened at a late stage, albeit with more difficulty."
It added: "The FSA's failure to assess the risks of the deal represents a serious misjudgement on the part of the supervisory team and the senior management.
"We need a regulator with the self-confidence to intervene."
The report also said it was "a matter of considerable surprise" that individuals at RBS were not held responsible, except for Johnny Cameron - former RBS director and chairman of its global banking and markets division - who agreed not to take a top City job again.
RBS made its acquisition of ABN at the height of the boom in 2007, just before the financial crisis struck.
The deal weakened its capital position and left it highly vulnerable to the credit crunch.
Trade union Unite said "the reckless folly of RBS management and lax regulation" cost 30,000 jobs at RBS since its collapse.
As well as its £45.5 billion bailout, which has left RBS 80% owned by the State, the bank was also covered by a £282 billion Asset Protection Scheme paid for by the taxpayer.
It said this week it was exiting from the scheme, which was originally designed to insure it against losses on toxic assets.
Committee chairman Andrew Tyrie indicated that he did not believe today's critical report should stand in the way of FSA chairman Lord Turner being considered as a candidate for Governor of the Bank of England.
Asked whether the criticisms made Lord Turner a "poor candidate" for the Bank job, Mr Tyrie told BBC Radio 4's Today programme: "I think Lord Turner himself said that he should have grasped the need for a much more substantive public explanation than a one-page news release when they decided that no enforcement action was needed against RBS.
"The fact that he has made that admission was a very sensible thing. It was very sensible of him to do that and also it signals to us that here is somebody who has grasped the mistake and is acting on it.
"If you are going into battle, it is a good idea to have a general who has fought the odd skirmish.
"We are saying that Lord Turner has grasped the need for a different approach and has got on with it and he has engaged very constructively in making sure that this report was thorough. Once the Treasury Committee did press the FSA for action on this and once that penny dropped with Lord Turner, he did what was required.
"I don't think you should draw too many conclusions from that. Yes, there are some criticisms but there is a recognition that action was taken once the points we were making were grasped."
Mr Tyrie said that, with hindsight, there was "clearly a catastrophic lack of judgment at the time of this deal".
But he added: "The question is would we have known that at the time, at an early stage when intervention would have been straightforward? A reasonable-minded person would have had to conclude it was quite difficult. We have concluded in our report that, even though it was quite difficult and would have been a tough call, that intervention should have taken place."
Mr Tyrie said he believed that the culture of the City was now changing in such a way that a repeat of the RBS debacle is less likely.
"I think the banks have got the message and the mood has changed fundamentally," he said. "I think the financial community as a whole in Britain has got the message and a lot is changing right now.
"There is a change in culture taking place. It needs a further nudge or two and a recognition by regulators that their job is not just to make sure things look pretty in the regulatory garden and go off for dinner. Their job is to be thinking extremely hard about where the risk really lies in these institutions."
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