Loopholes in the regulation made it possible that such assets were issued by special purpose vehicles that were mainly founded on a short-term basis. The risks of these complex and hard-to-value assets were underestimated. As a consequence, the global financial system became strongly interconnected. At the same time, the leverage of the financial system as a whole increased sharply, making the system more vulnerable.
In regulation economics, the term “regulatory capture” refers to a phenomenon when regulators or supervisors end up identifying too strongly with the interest of those they were charged with regulating.