Third, if inflation expectations remain well anchored, the real return expected by borrowers and lenders--equal to the nominal interest rate less expected inflation-need not rise even as inflation declines.
In many cases, firms also neglected to define prudent firm-wide risk limits on these exposures. Second, risk management and measurement capabilities did not keep pace with rapid financial innovation and the evolution to market-based credit intermediation. Third, certain aspects of regulation, supervision and market transparency failed to reflect financial market developments and therefore contributed to weak practices at banks.