Lawmakers allowed bank consolidation and market power in violation of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. That act specified that no single bank may hold more than 10 percent of total retail deposits. Unfortunately, since 1994 two limitations of Riegle- Neal became clear, (1) the growth of big banks was not fueled by retail deposits but rather by various forms of “wholesale” financing, and (2) the cap was not enforced by lax regulators, so that Bank of America, JP Morgan Chase, and Wells Fargo all received waivers in recent years.
Then Congress had to repeal the Glass-Steagall Act of 1933, so that any financial institution can act as an investment bank, a commercial bank, and/or an insurance company. They hid this as the Financial Services Modernization Act of 1999.
To capitalize on insatiable greed, banks started marketing OTC derivatives (a.k.a. as swaps). For swaps, delivery places and dates, volume, technical specifications, and trading and credit procedures are subject to negotiation by the parties to the contracts. Swaps are traded on a bilateral basis not on a public exchange. The exposure is to default by the counterparty. Credit risk mitigation measures, such as regular mark-to-market and margining, are optional for swaps. Swaps have no regulatory oversight, they are simply goverened by the contractual relations between the parties.
Here is the takeaway: OTC derivatives grew to an estimated size of about $596 trillion before crashing in Sept. 2008. By contrast, the value of the world's financial assets—including all stock, bonds, and bank deposits—was pegged at $167 trillion in 2007.