SURPRISING nearly everyone, including itself, Congress has done something right. House and Senate have agreed to dismantle a law that was badly conceived and kept alive out of sheer prejudice. Passed in 1933, that law—the Glass-Steagall act (named after the two men who pushed it through)—prohibited banks, investment banks and insurance companies from entering one another’s business.

Such a draconian restriction, you might think, must have had the soundest of motives. Indeed it did. In the four years following the Wall Street Crash in 1929, some 11,000 of America’s banks, a third of the total, collapsed. Everyone concluded that they must have been speculating on the stockmarket, and politicians made sure that banks would never be allowed to do so again. Actually, these fears had no basis in fact. Banks had not, as it turns out, poured depositors’ money into the stockmarket. Nor was there any evidence for a second worry: that banks had foisted on a naive public shares in dodgy companies which owed them money.

If the premise was bad, it should come as no surprise that the effects have been dreadful. Fragmentation has meant fragility. America’s financial institutions, especially its banks, have gone bust in droves whenever the economy (or anyone else’s) took a turn for the worse. Think, for example, of the Texan banks that went bust after the oil-price collapse in 1986; of the New England ones, felled by the bust in that state’s property market; or of how many of America’s finest came perilously close to the edge in the Latin American debt crisis.

Recent deregulation seems to have given America a sounder banking system. In 1994, laws that stopped banks opening branches in other states were scrapped. Regulators have nibbled away at Glass-Steagall, by allowing banks to conduct some securities business. Such changes (and a booming economy and stockmarket) have helped banks grow bigger and more profitable than ever. As Japanese banks have shown, size is not a protection in itself—but diversification into different businesses and parts of the economy should be.

Cynics suggest that Congress is only doing away with Glass-Steagall now because it has already been well and truly bypassed. Citigroup, which was formed by a merger last year of Citibank and Travelers, an insurance-and-stockbroking firm, already does just about every sort of financial business. But scrapping Glass-Steagall will have an effect. Were it not repealed, Citigroup would have had to shed its insurance-underwriting business. More generally, the way in which financial-services firms have had to structure their entry into other financial businesses has made such forays cumbersome and costly—for them and their customers. Legislators claim (with dubious exactness) that the repeal of Glass-Steagall will save consumers of financial services some $15 billion a year.

Some worry that a more concentrated financial system could work in the other direction; that, although some safeguards have been put in place, private information about consumers will be too available to all parts of the new financial-services groups; and that financial giants will have scant interest in lending to the poor. In short, many fret that getting rid of Glass-Steagall, though good for financial firms, will be less good for those that use them.

Some of these concerns—about privacy, for example—are legitimate. But the price of financial services will surely not rise: new technology, especially online financial services, is too powerful a force in the opposite direction. There is a bigger worry, though. Why, if politicians are at last to do something about the Depression-era rules that govern financial firms, have they not tried to update America’s supervisory structure at the same time?

It is hopelessly fragmented and costly. Banks are regulated by two Federal bodies, the Federal Reserve and the Office of the Comptroller of the Currency. Tellingly, the two argued for months about who should have primary responsibility for regulating banks. That they have found a way to divide it is hardly encouraging: the result will be confusion and mistakes. Insurance companies have no federal regulator. The securities industry is regulated by the Securities and Exchange Commission and the Commodities and Futures Trading Commission. For a firm such as Citigroup, with its fingers in every pie, that is an awful lot of regulators.

All this is especially troubling, because financial firms will be keen to get into businesses from which they were previously excluded—and quickly, because an accounting trick known as pooling of interest, which flatters the profits of the merged entity, will be scrapped at the end of next year. Big financial firms are already difficult to manage: Citigroup this week announced that it was hiring Robert Rubin, the former treasury secretary, bringing its roll-call of chairmen to three. Firms that marry in haste, choosing partners from different regions of the financial world, may repent at leisure in harder times. History is liberally dotted with crises caused by liberalising finance without improving supervision.

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