In the past few days, banking has faced market upheaval and political attack that put the industry under stress not seen since the Great Depression and Franklin Roosevelt’s concerted attack on “economic royalists.” The acid bath of the 1930s redefined commercial banking for the next sixty years. Will persistent unemployment, the populist movement on the street against big banks and, now, presidential vilification do the same?

That the best defense for U.S. banking is Washington’s profound dysfunction speaks to the gravity of the threat — one made still more dangerous if banking retreats to a bunker of business as usual and political self-defense. If banking waits this out, it will surface to find the business model redefined — a change that will not only cost the industry dearly, but also prove profoundly counter-productive for advocates attacking banking in hopes of sparking the urgently-needed recovery.

First, to the threat: a new regulatory model that governs banks, especially large ones, like utilities.

And, then, on to what banking can do about it. Where banks and their critics — especially those in the White House — concur is that credit is in all too scant supply. Bankers blame a lot of this on regulation and the rest of the problem on the recession — mostly right in both cases.

It’s time for bankers to do something about both of these challenges instead of waiting for someone else to get credit demand going again. The industry is sitting on a trillion or so in unused capacity, turning away deposits and turning down the few borrowers who come its way. If banking can’t fix this, it will have no one but itself to blame when the new rulebook is revealed.

In many ways, banks — especially large ones — are already in the thrall of a new business model even worse than the utility one: the industry is frozen solid in fear both of relentless credit risk and remorseless regulatory requirements.

Can larger banks buy much of anything even if the acquisition is a distress sale by a troubled institution? Not if the CapOne fracas is the precedent we fear it to be. Can banks offer new mortgage products to promote refinancings and help get the nation out of the mortgage morass? Not without some guts and, even then, help from the government, none of it evident so far. Small-business lending? Fearful of credit risk and regulatory-capital calls, bankers are largely sitting this out. What about new consumer products, including in the critical retail-payment arena? Here, the industry has exacerbated its woes with ill-timed pricing pronouncements, but the answer is still the same — too much regulatory risk in concert with too little industry ingenuity

This regulatory risk is now the dominant defining factor for the largest U.S. banks, incapacitating the industry from a ready response to the recession. The utility model is thus close at hand, as can be clearly seen when the cost is calculated for the burgeoning rulebook of capital, liquidity, resolution, business-practice, product-line, consumer-pricing and dividend-defining standards. That some of these rules make sense is for sure. That all of them taken together combine in unintended, cross-cutting and very costly ways is also sadly for sure.

Without anyone necessarily meaning to do so, the new rulebook is beginning to look very much like the one that has long governed public utilities: defining the customers a firm must serve, what a firm can do, how much it can charge to do it and, then, allowing a bit of a regular payment to go to passive shareholders assured by regulatory dictates that failure is impossible because innovation is barred.

As bankers confront this new, bleak business model, they can’t blame it all just on virulent anti-business sentiment. At the same time “Occupy Wall Street” is on the barricades, consumers across the nation are mourning the passing of Steve Jobs, a CEO with scant interest in good works if they weren’t embedded in a new i-product. Why the enmity for bankers and the affection for Mr. Jobs? It’s because Steve Jobs had the guts to offer consumers products they wanted and needed even if they didn’t always know it. This transformed personal communication and computing in ways many Americans found transformational even as Apple turned a more than tidy profit.

Can bank do the same — develop innovative products that meet customer need and, thereby, make customers happy and bankers rich? It’s harder, because of course new bank products must not only capture the customer’s attention, but also meet a banking regulator’s careful scrutiny — a challenge that might have daunted even Mr. Jobs.

But, is this impossible? Until it’s tried, no one will know, but it can’t be as hard as the industry has made it seem. Indeed, if the only challenge to developing new products or again offering tried-and-true ones is a regulator’s case of the willies, then banking needs to say so.

In the past year or so, most of the industry’s protests about “unreasonable” regulation have come through calls for examiners to look the other way so troubled creditors someday, somehow make a bad loan turn good again. This focus on the legacy book is understandable — it’s big, it’s bad and examiners are a careful lot. But, all too often, protests over the legacy book are battles largely to forestall the inevitable, battles that often protract agony and worsen its impact.

If the legacy book defines banking, as it threatens to do, then the industry’s bunker will be a fragile refuge. If, though, a new legacy book is built based not on the past, but rather on what legacy really means — what one leaves behind — the industry could redefine itself and, while regulated in ways often uncomfortable for high-flyers, provide real value to diverse consumers in need of a wide array of financial products.

Thus, it’s not enough to say Occupy Wall Street is a fringe movement — it isn’t anymore — or that the president has it in for bankers — he doesn’t. Critics are, if anything, even more frustrated with the credit-market quagmire than bankers, and they just turn to the tools they have at hand in hope of forcing new loans and old products for customers in desperate need. Politicians are good at cat-calls. It’s all too easy for bankers to take them personally, especially when some of them are. But behind the cat-calls is a desperate call for banking to go back to business. If regulators won’t let the industry do so, say so. If, as Roosevelt might have said, it’s fear itself that’s freezing bankers in the bunker, then we have only ourselves to blame.