This has been an unholy Holy Week. The panic triggered by the near-collapse and subsequent rescue of Bear Stearns was the most terrifying moment for world markets for decades. Volatility continued until Thursday, when most of the world’s markets took a breather for Good Friday.

This was the week when investors thought the unthinkable. And the seeds of this terror, I suggest, lay in another unholy Holy Week, ten years ago.

In 1998, Sandy Weill and John Reed, the chief executives of the financial behemoths then known as Travelers and Citicorp, spent Palm Sunday putting the finishing touches to the extraordinary merger that would create Citigroup.

The huge company they announced to an amazed but excited world next day would be by far the world’s largest bank. More importantly, it would break down distinctions that had been rigidly enforced by US banking laws ever since the Depression. Commercial banking, investment banking and insurance would all be under the same roof.

Financiers had been chipping away at those regulations, centred in the old Glass-Steagall legislation, for years. But “Citigroup” presupposed the outright repeal of the legislation. The gambit was successful, and the legislation was replaced within months, setting the stage for large commercial banks – which made loans to companies but did not previously underwrite share offers or securities – to enter the arena of investment banks.

The initial reaction to Weill and Reed’s plan was ecstatic. Now, it seemed, anything was possible. Over the long Good Friday weekend, two more huge deals were put together. Easter Monday – a working day in the US, if not in much of Europe – brought news of two deals that created US commercial banks on a scale not seen before. NationsBank and BankAmerica merged to form what is now Bank of America, while Bank One and First Chicago NBD merged to create Bank One, which has since, after more moves on the mergers and acquisitions chess board, become part of JPMorgan Chase.

These deals were significant in another way. Banking regulation should ultimately rest on capitalism’s application of human fear to the actions of banks’ managers: if they take too many risks, they should face the risk that the bank goes bust and they lose their money.

There comes a point when a bank is “too big to fail” – when its collapse would cause too much loss of wealth, and wreak too much damage on economic activity, to be allowed to happen. It is impossible to give a hard and fast measure of when this happens, but you know it when you see it: the new Bank of America was plainly too big to fail.

If a bank knows that the government regards it as too big to fail, then it has an incentive to take excessive risks. Capitalism alone cannot keep it in check. That means that governments must do more regulating. A giant bank should, effectively, be a regulated utility.

But in the wake of these deals, the old regulatory system slouched onwards. No new financial regulator arose, even as financial power was concentrated into ever fewer, ever bigger institutions. With regulation lighter than before, the new financial giants went about creating the financial system whose internal contradictions are now apparent.

The Bear Stearns rescue, and the unprecedented moves it required from the Fed, demonstrated that the old regulatory system will be needed.

Although this has not been codified in any law, giant banks do now have certain obligations, like those of utilities. Hence it is not a coincidence that the two major US institutions have been bought out in effective rescue deals since this crisis began – Bear Stearns, and Countrywide Financial, the biggest US mortgage lender – have been acquired by the successors of the two giants that were formed on Easter Monday ten years ago, JPMorgan and Bank of America.

JPMorgan, in particular, is almost acting as an arm of government, using credit provided by the Federal Reserve to do a job normally done by a bankruptcy liquidator.

The US economy is not as dominant within the world as it once was, but its financial system is still, de facto, the financial system of the world. European giants such as UBS, Credit Suisse and Deutsche Bank all own huge companies that were once Wall Street titans, and are hence subject to US regulation.

The Federal Reserve has undertaken many moves in the last few weeks that have never before been part of its remit, lending directly to brokers (it was designed to service only commercial banks), accepting mortgage-backed bonds as collateral for its loans, and announcing changes to monetary policy late on a Sunday evening in Washington.

These changes have been made in a hurry. Once the dust settles on the crisis, which may yet be months or years from now, those changes will morph into a new system.

Even if the damage this crisis does to the economy does not match the economic disaster of the 1930s, it will lead to changes in the way we are all protected when we invest that are just as great.