FOR a few tense weeks in 2008, as investment-bank executives huddled  behind the imposing doors of the New York Federal Reserve, Wall Street  seemed to be collapsing around them. Lehman Brothers filed for  bankruptcy, Merrill Lynch collapsed into the arms of Bank of America.  American International Group (AIG) and Citigroup had to be bailed out  and the rot seemed to be spreading. Hank Paulson, the treasury secretary  at the time, recalled in his memoir that: “Lose Morgan Stanley and  Goldman Sachs would be next in line—if they fell the financial system  might vaporise.”

Across the Atlantic, European politicians saw this as the timely  comeuppance of American capitalism. Angela Merkel, Germany's chancellor,  blamed her peers in Washington for not having regulated banks and hedge  funds more rigorously. European banks saw the crisis as their chance to  get one up on the American banks that had long dominated international  finance. Barclays quickly pounced on the carcass of Lehman Brothers,  buying its American operations in what Bob Diamond, the head of its  investment bank at the time, called “an incredible opportunity” to gain  entry to the American market. Deutsche Bank, a German giant, also  expanded to take market share from American rivals. The dominance that  American firms had long exerted over global capital markets seemed to  have come to an abrupt end.

Almost five years on it is Europe's banks that are on their knees and  Wall Street that is resurgent. Switzerland's two biggest banks, UBS and  Credit Suisse, which were expanding fast before the crisis, are still  shedding assets. Royal Bank of Scotland, which for a brief time broke  into the ranks of the world's ten-biggest investment banks, remains a  ward of the British government. The share of the investment-banking  market held by European banks has slumped by a fifth since the crisis  (see our special report), with many of the gains going to Wall Street's  surviving behemoths. JPMorgan Chase, Goldman Sachs and Citigroup alone  account for a third of the industry's revenues. Two European outfits,  Barclays and Deutsche Bank, have managed to share in some of these  spoils since the crisis. Both, however, face hostile regulations at home  and abroad that seem likely to crimp their global ambitions. And  although HSBC has increased its share of some investment-banking  markets, it is still well behind Wall Street's titans.

The industry over which Wall Street is reasserting itself is very  different from the one it dominated half a decade ago. Revenues globally  have fallen by about $100 billion, or almost a third. Employment has  plunged, with London alone shedding 100,000 jobs. Pay has fallen too.  Higher capital requirements and other regulations, including America's  absurdly complicated (and still unfinished) Dodd-Frank act, are likely  to erode the profitability of the industry. The stellar returns earned  by banks before the crisis and the massive rewards paid to their  employees are unlikely to recur soon, if at all.

One of the reasons that American banks are doing better is that they  took the pain, and dealt with it, faster. The American authorities acted  quickly, making their banks write down bad debts and rapidly raise more  capital. Those that proved unwilling or unable, and even those, like  Goldman, that claimed they didn't need it were force-fed additional  capital. As a result America's big banks have been able to return to  profitability, pay back the government and support lending in the  economy. This has helped them contribute to an economic revival that in  turn is holding down bad debts.

European banks, in contrast, are continuing to  and limp along with  insufficient capital. Citigroup alone has flushed through $143 billion  of loan losses; no euro-zone bank has set aside more than $30 billion.  Deutsche Bank, which had insisted it did not need more equity, has at  last faced reality and is raising almost €3 billion ($4 billion).

European regulators have also contributed to their banks’ decline, in  two ways. First, they are specifying how much banks can pay in bonuses  relative to base pay. Second, they are trying to force banks to hold  more capital and to make it easier to allow them to fail by, for  instance, separating their retail deposits from their wholesale  businesses.

The first approach is foolish. It will drive up the fixed costs of  Europe's banks and reduce their flexibility to cut expenses in  downturns. They will therefore struggle to compete in America or  fast-growing Asian markets with foreign rivals that have the freedom to  pay the going rate for talent. The second approach is sensible.  Switzerland and Britain are making progress in ending the implicit  taxpayer subsidy that supports banks that are too big to fail. The  collapse of Ireland's economy is warning enough of what happens when  governments feel compelled to bail out banks that dwarf their economies.

Some European bankers argue that the continent needs investment-banking  champions. Yet it is not obvious that European firms or taxpayers gain  from having national banks that are good at packaging and selling  American subprime loans. Indeed, it is American taxpayers and investors  who should worry about the dominance of a few Wall Street firms. They  bear the main risk of future bail-outs. They would benefit from greater  competition in investment banking. IPO fees are much higher in America  than elsewhere (7% v 4%), mainly because the market is dominated by a  few big investment banks.

Wall Street's new titans say they are already penalised by new  international rules that insist they have somewhat bigger capital  buffers than smaller banks because they pose a greater risk to economies  if they fail. Yet the huge economies of scale and implicit subsidies  from being too big to fail more than offset the cost of the buffers.  Increasing the capital surcharges for big banks would do more for the  stability of the financial system than the thicket of Dodd-Frank rules  ever will.

Five years on from the frightening summer of 2008, America's big banks  are back, and that is a good thing. But there are still things that  could make Wall Street safer.