In recent weeks our financial markets have shown signs of recovery thanks to unprecedented action to stabilise markets and stimulate the economy. Yet this crisis has many distressing qualities. Perhaps most dispiriting is the sense that we have seen this movie before, and it wasn’t very good the first time, either.

When President Bill Clinton came into office in the early 1990s, the US faced, among other challenges, waves of thrift and bank failures, huge hits to its deposit insurance system, and enormous piles of “toxic assets” in need of taxpayer-financed liquidation. It was a colossal regulatory failure.

Determined to identify the causes, Lloyd Bentsen, then Treasury secretary, proposed legislation to consolidate all four federal banking regulation and supervision agencies into a single body. That proposal went nowhere. The Federal Reserve opposed any reduction in its turf. Lobbyists fiercely asserted the benefits of “competition” among regulatory agencies. After months of struggle, the legislation died an ignominious death.

Nearly 20 years later, our financial regulatory system has failed us again, on a scale so massive as to make the failures of the late 1980s and early 1990s seem quaint. Once again, we have a new president determined to overcome a legacy of inattentive financial regulation.

President Barack Obama and Tim Geithner, his Treasury secretary, deserve credit for their willingness to tackle modernising financial regulation. There is little political reward for taking on these issues. It is no-fun technical stuff, poorly understood by the general public and the media. And as past administrations have learnt, the status quo has many stakeholders who will bitterly oppose even the most objectively meritorious change.

But unfortunately, the Obama administration’s proposal contains too much status quo to protect taxpayers against the costs of future bank failures. While Bentsen’s proposal in 1993 would have shrunk the federal banking regulators from four to one, Mr Geithner’s would eliminate only the Office of Thrift Supervision through consolidation with the Office of the Comptroller of the Currency. This approach leaves a single regulator for federally chartered banks, plus two federal regulators, the Federal Deposit Insurance Corporation and Federal Reserve, for banks chartered by the states, plus an additional regulator, the Federal Reserve again, for all companies that own banks.

As complicated as this may appear it has a clear consequence: it would allow financial groups to continue to shop for the weakest regulator. The opportunity for regulatory arbitrage will encourage money to migrate to the most weakly regulated parts of the system. This system is inefficient, unaccountable, and expensive to administer. It is inconsistent in its approach and would be uneven in its results. It is poorly equipped to identify industry-wide trends and conditions early. Competition among federal regulators makes no more sense in banking than in food safety or air traffic control.

We need a single agency combining the OTS and OCC while absorbing the responsibilities of the FDIC and Federal Reserve for prudential regulation and supervision of banks and their holding companies, affiliates and subsidiaries. This agency should have a level of independence commensurate with the FDIC and Federal Reserve (including an independent chair) with the authority to oversee banks from top to bottom and end to end.

Through this reorganisation we can create a more powerful and effective federal bank regulator while preserving the dual banking system with both state and federal chartering and allowing the Federal Reserve and FDIC to focus on their core responsibilities for monetary policy and deposit insurance, respectively.

We need a system that can tolerate risk and promote safe innovation. We cannot afford hobbled regulators that can be played off one another, forced to pull punches for political reasons, or that are too compromised by other missions to act.

Of course this is hard. But we need real solutions, not half measures. Because we have not learnt from history, we have been doomed to repeat it: in just 20 years, our federal bank regulatory system has twice failed our country, at massive risk and expense to taxpayers. It is time to change the ending to this movie.

The writer is the US senator from Virginia and a member of the Senate’s banking committee