As Charles Kindleberger argues in his famous book “Manias, Panics and Crashes”, financial crises are typically the result of a prolonged accumulation of imbalances, preceded by some exogenous shock or structural change in the financial system. Examples are changes in the political environment, new regulation and financial innovation.
These changes create new opportunities but also uncertainty and a lack of awareness about potential new risks – the socalled “unknown unknowns”. In such an environment, traditional checks and balances may become inadequate and easily lead to excessive risk 4.