Host country regulators, including those in the United States, had not exercised prudential oversight of some foreign  4  4  The current version of this obligation is set forth in Basel Committee on Banking Supervision (2012), “Core Principles for Effective Banking Supervision“ (Basel, Switzerland: Bank for International Settlements, September).
That a collection of rational financial institutions does not necessarily make a rational financial sector. In other words, rational behaviour at the individual institutional level does not aggregate to collective rationality because of the fallacy of composition. Financial institutions are notoriously prone to herd behaviour.