Before the crisis, lending in industrial countries grew by around 10% annually. The low interest rates and the abundant availability of credit encouraged a search for yield. Risks were underpriced and bubbles could easily arise, especially in real estate. This was the case in the US but also in some European countries.
With hindsight, the interest rates were too low to tame the monetary expansion and other, more macro-prudential, instruments should have been deployed to contain the credit expansion. What has been the impact of the crisis? Serious damage in financial sector, partly at governments’ expense 6. Writedowns on securitisation products and on ordinary loans led to huge losses in the banking sector.