In an effort to expand loans in an optimistic environment, potential returns are often not fully adjusted for risk, with the nominally high-yielding credit looking particularly attractive. Moreover, credit specialists at banks – a function often separated from the loan officers – historically have had difficulty making their case about risk because of their inability to measure and quantify risk.
At the same time, with debt service current and market risk premiums cyclically low, and with the same inability to quantify and measure risk, supervisory criticisms of standards are difficult to justify.