Third, many retail and commercial banks expanded into investment banking. This allowed banks to package traditional lending with higher value-added agency business, marketmaking activities and, increasingly proprietary trading. Banks' push into markets helped spur the proliferation of over-the-counter derivative products, which created counterparty and investment risks that were difficult to identify and control. Incentive problems also plagued this transition.
Very much to the ECB’s regret, the reform of the Stability and Growth Pact in 2005 weakened the fiscal framework substantially. The greater flexibility that was created has led to a lack of enforcement of fiscal discipline at the EU level and insufficient national incentives to comply with the EU rules.