The lending booms that we have experienced in some euro area countries before the crisis offer a good illustration: During the upswing banks reported high levels of profitability and low levels of measured risk. Both of these factors tend to improve capital ratios, offering a reassuring picture of the solvency of individual banks from a micro supervisory perspective.
Yet historical experience shows that rapid credit growth is usually undertaken at the cost of increasing the systemic – or tail – risks for instance by lowering lending standards via undiversified housing exposures or excessive reliance on short-term market funding.