You can't please all the regulators all the time

It's just a little bank - a community bank - that makes a bit of money by holding money and lending money.

Simple. Ben likes his bank. He would like to see it prosper.

Ben calls the Federal Reserve in Washington DC to figure out how to sign on as a little state bank in Mississippi. "Sorry, but you're not one of mine," says a nice man, also named Ben.

"You've got the wrong guy. Try one of our branches. They will know what to do."

Ben calls the Federal Reserve branch in San Francisco. He calls the branch in Boston. He calls the branch in New York.

He calls all 12 branches of the banks' bank until he gets to Atlanta, which covers Mississippi.

Atlanta sends him to the Federal Deposit Insurance Corporation.

The FDIC sends him to the Office of Thrift Supervision. The OTS sends him to the Office of the Comptroller of the Currency.

The OCC sends him to the state of Mississippi, which thinks his bank is a great idea and says it can offer him a licence.

And away he goes.

But then Ben starts getting letters from the places he's been.

Mississippi tells him all about the Mississippi Mortgage Consumer Protection Law, the Sale of Checks Law, the Consumer Loan Broker Act, the Vehicle Sales Finance Law, the Mississippi Pawnshop Act and a raft of other laws he has to know all about. He has to pay a lawyer to be sure the bank knows all the laws and isn't breaking any.

The Federal Reserve tells him he needs to hand over some money at their branch way up in Atlanta so that everyone can be confident that Ben's bank is solvent.

He has to put some money into the FDIC in case his bank gets robbed or some other god-awful thing happens; if it does, his customers get up to $US100,000 apiece.

He has to put some money into the OTS (which he doesn't understand yet), apparently because Congress won't.

The letters he gets from the OCC he's pretty sure are a mistake.

Most developed economies operate single-regulator banking systems. In Australia, the Australian Prudential Regulation Authority watches over banks like Ben's, and it watches over bigger banks like Commonwealth Bank, ANZ, Westpac and National Australia Bank.

APRA also has an eye on companies such as Macquarie Bank and Babcock & Brown, which aren't like Ben's bank, but which do some of the same things.

But the US system of bank monitoring is obtuse, sprawling and fragmented. Thanks to the US subprime crisis, it is also under serious pressure to change.

For decades, banks around the world had been busy coming up with innovative ways to make more of their balance sheets. A game had evolved around the Glass Steagall Act, legislation written in 1933 that separated commercial banks, which take deposits and make loans, from other financial companies, such as brokers and investment banks.

But since the presidency of Ronald Reagan, there has been a continuous and concerted deregulation of the financial system in the US and many other countries. Until, in 1999, under the advice of then Treasury secretary Rob Rubin, president Bill Clinton repealed Glass Steagall.

Its replacement has been blamed for contributing to the US's current economic straits.

Let's say Ben's bank booms. People hand over their savings and he puts the savings in his vault. They come to him with their dreams - of homes, of universities, of cherry-red Firebird convertibles - and he hands them back their money with a bit of their neighbours' money to top it up. Their dreams come true, and they pay Ben interest. It's a wonderful life.

But pretty soon Ben's bank reaches a limit. The money his customers hand over isn't enough to cover the loans they want. Ben goes to places tailor-made to keep banks like his in business. He can go to a company called Fannie Mae, or a company called Freddie Mac. These companies, which were once government agencies, will give Ben money now in exchange for the money he expects to earn on the loans he has given to his customers.

Alternatively, thanks to the repeal of Glass Steagall, he can sell his loans to investment banks such as Citi or Merrill Lynch, which will break them up and sell them on to investors keen for the steady returns they generate.

It's a great deal for Ben. He doesn't have to worry about whether his customers can pay him back over time and he can take the money from Freddie or Fannie and hand it over to the next person who wants a loan.

"You could look at the last 10 years as a history of 'double or nothing'," says University of Queensland economist John Quiggan.

Banks would package up loans they didn't want to hold and sell them to "Structured Investment Vehicles" or "conduits" - effectively debt conveyor belts, which borrow money to repay money - purely for the purposes of keeping the debt from showing up on the bank's own balance sheet.

Since then, because the people who borrowed the money in the first place have been unable to repay their debts, banks have been forced to return the debt to their balance sheets. National Australia Bank has estimated it will lose more than $1billion this year in the exercise.

There is an out for banks like Ben's in this situation. As part of his account at the Federal Reserve, Ben can access emergency money at a discount. It's a desperate measure, but it is one of the main benefits of membership and one of the only things left that separates commercial banks from investment banks.

But when Bear Stearns threatened to collapse, the Fed moved to open its discount window to a host of companies it had previously kept out.

But although the measure was "temporary", it has solidified in the mind of the market that, if the Fed is needed, it will open the window even to those over which it has no direct regulatory power. This leaves an expensive regulatory imbalance, which has already led to discussion about a new regulator with broader oversight.

Advocating for more regulation is by no means a default setting for any at the top of the US financial system. In fact, in early 2007, US Treasury Secretary and former Goldman Sachs chief executive Henry Paulson was leading panel discussions encouraging further deregulation of US financial companies. The fruit of those pursuits, a sweeping overhaul of US financial regulation, was released in March to a thud. By then the subprime crisis was in full swing and the plan looked only to give more rein to an industry running wild.

"Most of this blueprint should not be implemented until after the present market difficulties are past," he told

The Wall Street Journal.

By March, Paulson, flanked by Fed chairman Ben Bernanke and Securities and Exchange Commission head Chris Cox, was claiming that "regulation needs to catch up with innovation" in the financial markets.

A large part of that sudden impetus towards reregulation is a result of the actions Paulson and Bernanke have had to take to save institutions that had become too large and intertwined to be allowed to fail.

Most of the changes Paulson was proposing have flown out the window and his chances of implementing anything like a deregulation policy get further away with every passing day.

Former derivatives trader Satyajit Das, who predicted the credit crisis more than two years ago, says the sensible thing for regulators is to re-envisage Glass Steagall; to remake the banking industry as it used to be, separate from other financial businesses.

"What they should do is to say, there are now two completely different businesses," he says. "One is a business it's impossible to regulate in a sensible way - we've tried - and we're going to say now it's caveat emptor; so, if you want to put your money into this, good luck.

"I don't think that they are going to do it. They are going

to try to regulate it, the poor buggers."

Quiggan says it is just as likely that regulators will wait for the crisis to blow over and go on with business as usual.

"But if things go really wrong, we could see things like Glass Steagall coming back."