Monetary policy and financial system I have to this point described the possible need to balance longer-term financial stability and shorter-term economic growth considerations in the implicit context of a specific point in time, with the decision on use of supervisory, macroprudential, or monetary policy tools dependent on the level and nature of the potential systemic risk, the likely efficacy of each tool in containing that risk, and the expected side effects of each tool on growth.
I would pinpoint the location of the flaw in the policy approach to regulation as lying in the presumption that the instinct for self-preservation of well-governed firms would be sufficient to protect the system, thereby allowing light-touch regulation. (The presumption was mistaken: the banks were not well-managed from the risk point of view).