This is exactly what went wrong in the run-up to the crisis. Lending rates converged throughout the euro area, and no longer reflected actual underlying risks. Several potential  BIS central bankers’ speeches  1  explanations have been put forward for this. One reason often mentioned is the search-foryield as a consequence of the low interest-rate environment.
Or the fact that the no-bail out clause in the EU Treaty was perceived as not credible. Yet another explanation is that gaps in banking regulation were the primary cause of the mispricing of risks in the run-up to the crisis. In my view, all three explanations have been relevant. In fact, these factors are likely to have reinforced each other. 8.