Banks and building societies turned a deaf ear to warnings that the good times were about to stop rolling in the lead-up to last summer's credit crunch, a report by MPs accuses today.

Pleas for more caution from the Bank of England and Financial Services Authority (FSA) over worsening market conditions were shunned, the Treasury select committee said.

Its members called on the Bank and the FSA to take a firmer line with boardrooms in monitoring potential problems.

Committee chairman John McFall said: "We must ensure that in the future such warnings are heeded and acted upon by those at the top of financial institutions."

The report, Financial Stability and Transparency, concludes that the framework through which the public authorities issue warnings of potential problems in financial markets is deficient and recommends that in future the Bank and the FSA should highlight the two or three most important risks in a short covering letter to financial institutions, for discussion at Board level.

The Bank and FSA should seek confirmation from those institutions that these warnings have been properly considered and publish commentaries on the responses received.

MPs attacked the lack of transparency over "ludicrously complex" financial instruments such as mortgage-backed securities which shook the financial system last August. Sudden doubts over the value of the products following spiralling defaults on US sub-prime mortgages caused banks fearful of losses to stop lending to each other - triggering Northern Rock's financial woes.

Mr McFall said: "Product complexity has introduced increased opacity into our financial system, making it almost impossible to determine where risk lies and making it much more difficult to achieve financial stability."

As banks look to parcel up loans such as mortgages and sell them on to other investors they took a more cavalier approach to credit quality, the committee said.

"The evidence suggests originators of loans did not have sufficiently strong incentives to assess and monitor credit risks as carefully as investors would expect, given that risk would subsequently be dispersed to investors," the report said.

If the market and, in particular, the investment banks proved unable to address the problem of overly complex products, then regulation would need to be examined in the future.

Banks' use of off-balance sheet "special purpose vehicles" to sell on loans was criticised by the MPs as a "smokescreen" because of their less onerous regulatory requirements.

Mr McFall also blamed corporate investors for "throwing caution to the wind" in buying products they did not understand.

"Many investors were blind to the risks involved, equated complexity with security and were engaged in a bout of collective madness. You cannot regulate against stupidity," he added.

Mr McFall said: "Today's report merely marks the first phase. Our ongoing work on financial stability and transparency will address how we can better insulate people from the mistakes of big finance."