As in previous times of financial turmoil, the pre-crisis period was characterized by (i) surging asset prices that proved unsustainable; (ii) a prolonged credit expansion leading to accumulation of debt; (iii) the emergence of new types of synthetic financial instruments; and (iv) regulatory failure.
This time around the rapid expansion of securitization (not itself a new phenomenon), which changed incentives for lenders and lowered credit standards caused the crisis. Systems became fragile because balance sheets became increasingly complex (further complicated by increased use of off-balance-sheet instruments). Financial market players were highly leveraged and relied on wholesale funding and external risk assessments.