"Why are there so many banking crises?" asks the economist Jean-Charles Rochet in his new book. A good question, and one a lot of policy-makers have been asking since the credit squeeze began last summer. Yesterday, amid all the excitement as the bosses of the big five high-street banks met Mervyn King, governor of the Bank of England, in a pinstriped version of High Noon, it was easy to forget one thing: we have been here before.

The thing about banking crises is that they come around as regularly as a gondola on a ferris wheel. "Financial market crashes do not emerge randomly, but follow booms," wrote former Bank chief economist Charles Goodhart and fund manager Avinash Persaud recently. "What fuels the boom are market estimates that risks are low. This optimism encourages imprudent lending, which eventually leads to the next crash." At which point some of those banks that helped stoke the boom take a dive. Mr King is as aware of this cycle as the next long-suffering central banker, which is why he held out on financiers last summer when they demanded he pump more money into the system. After all, ran the reasoning, why should the Bank bail out financiers from their own mess? A bit of pain might encourage reflection and reform. That was a good policy, but eventually the banking turmoil got so bad - threatening to turn a slowdown in the wider economy into something much worse - that the Bank of England relented. The crisis of confidence in the banking industry has not gone away. That is why a mere rumour this week about a cash shortage at the giant HBOS knocked almost 20% off its shares. Faced with that kind of turbulence, Mr King and his colleagues have little alternative but to lend money to banks, and to keep on reducing interest rates.

This does not mean Mr King's earlier instinct was wrong. If the banks have landed themselves in such a mess that they now need a huge helping hand, conversely the same institutions need a great deal of reforming once the crisis has finally abated. Regulators and politicians would do well to identify key areas of the banking system that require changing. An obvious area is the reserves kept by banks to tide themselves over when trading conditions get tough. Both Northern Rock and the American investment firm Bear Stearns nearly collapsed after running out of ready funds; that indicates as brightly as a neon sign how much the reserve system needs an overhaul.

One idea, suggested by Mr Goodhart and Mr Persaud, is for banks to be required to build up their rainy-day funds when times are good. Regulators should also give serious thought to reforming bankers' pay. The current system of annual bonuses only encourages short-termism. Second, policy-makers should support only a few banks in clearly defined businesses. Not all banks are equally worth preserving. The Bank of England let investment firm Barings go for a song in the 90s, but would be far more worried about a big high-street bank getting into trouble. Under current regulations, however, high-street giants like Barclays can plough into financial trading knowing that if they get into trouble, regulators will have to bail them out. So the taxpayer is effectively underwriting any high-street bank that wants to get into (say) trading sub-prime mortgages. That is unfair on competitors and on the taxpayer.

After the Great Crash of 1929, the Americans introduced a law to prevent retail banks from getting into market trading. That system has been eroded in the past few years, thanks to business lobbying. Now would be a good time to restore that principle in the US and introduce it in Britain. Finally, this crisis has affected banks from Japan to the US to the UK. It has been international and underlined how badly we need a proper international monitor of financial flows. This would be a good task to give to a currently purposeless IMF.