My final point concerns the regulatory and supervisory framework. Looking back at how bubbles are formed, the bottom line is that it comes down to aggressive activity by both borrowers and lenders. Financial institutions’ activities are influenced not only by the expectation that a stable environment will continue but also by incentives created by the regulatory and supervisory framework.
As for the background to such aggressive activities by financial institutions, almost without exception regulation and supervision did not prevent them from getting involved in risky lending, which was, in retrospect, an attempt to improve their low profitability.