Both of these factors tend to improve capital ratios, offering a reassuring picture of the solvency of individual banks from a micro-supervisory perspective. Yet historical experience shows that rapid credit growth usually comes at the cost of increasing the systemic – or tail – risks, for instance, by lowering lending standards via undiversified housing exposures or excessive reliance on short-term market funding.
Again, the crisis raised awareness both of the endogenous nature of many systemic episodes of financial instability and of their negative externalities that could be of great importance in determining macroeconomic outcomes. From a policy perspective, the new focus has led to an increased interest in the macro-prudential approach to bank regulation and supervision.