Lord Adair Turner, the outgoing chairman of the Financial Services Authority and a candidate for Bank of England governor, said last night the FSA had spent its first eight years in a "fool's paradise" of delusion about financial risk.

In his final Mansion House speech before the FSA is disbanded next year, Lord Turner, who took over in September 2008 at the height of the crisis, said the regulator had been "brutally honest about its own failures".

But he said more important than the supervisory failures had been deficient rules, structure and culture. Banking liquidity levels had been woefully complacent, the FSA had been set up in the wrong way and "asked to do too much", while both bankers and policymakers had ignored the fact that banks had a wider responsibility than their shareholders.

Lord Turner added: "So the crisis was not a bolt from the blue – it arose from poor supervision, from bad rules and structures, from dangerous cultures – and the errors were made by regulators, economists, central bankers and public policymakers, as well as bankers themselves.

"A lot of apparently very clever people got it very wrong, and the ordinary citizen suffered. We have to do better in future."

He said the new prudential and conduct authorities, the Financial Policy Committee, the separation of investment from retail banking in the UK, and structural banking reforms across Europe, demonstrated a "rapid and extensive" response to the crisis.

There were also signs that "many banking industry leaders recognise the need for major change".

But Lord Turner warned of the deflationary effects created by deleveraging and "the flawed design of the eurozone project, launched without a commitment to a banking union, and without some fiscal integration".

The FSA chairman admitted he was wrong a decade ago to have called for the UK to join the eurozone, and said Chancellor George Osborne was right to warn now of creating the "financial stability of the graveyard".

He said: "The new structures which will be fully in place by next spring – and in particular the role of the FPC – are well designed, but we will need to use them well and to be open to further policy innovations if we are to overcome the deflationary headwinds we face.

"And we will need to support from outside, and influence as best we can, the redesign of the eurozone, to ensure our domestic efforts are not undermined by headwinds from abroad."