Lenders did not see a need to underwrite carefully because they did not intend to hold the loans themselves.
They form part of the inherent pro-cyclicality of the financial system.2 It is crucial to recognise that the financial cycle has an important endogenous component which arises because banks take too much solvency and liquidity risk. The aim of macro-prudential policy should be to temper the financial cycle rather than to merely enhance the resilience of the financial sector ahead of crises.