The effects on the international financial system were thus slight, although the crises affecting both Asia and Russia led to extensive redistribution of wealth and political tumult in the countries concerned. There are probably several reasons why the effects were so limited. One is probably that economic policy has become more predictable in many countries in recent decades, with sound public finances and stable, low inflation. The markets should therefore be less sensitive to shocks. However, another reason is actually that the financial system has become more resilient. The fact that risks have a better spread makes the system more stable. The risks are also transferred to the agents who want them or should have them. There is also the fact that the banks have gained more experience of operating in deregulated financial markets. The development towards more market-based transactions means that banks can now concentrate on the risks they are best at managing. They have also become better at managing them, with well-developed risk management methods and models. So far, so good. A better spread for risks and improved risk management can contribute to better absorption of shocks to the financial system. On the other hand, there can be elements that increase the risk of more serious shocks that also spread throughout the whole system. …or have they become more prone to risk? One such tendency could be an increased propensity among market agents to take greater risks and to copy others’ actions.
If the asset managers are lucky, they will manage to predict the period with a positive yield and the rare loss will not become a reality during the period they are being evaluated. This appears more likely the shorter the evaluation period is. Willingness to take risks can increase in a low interest rate environment. Agents may then wish to take more interest rate risk and perhaps come further out on the yield curve, thus becoming more sensitive to rapid interest rate fluctuations. They may also look for new types of investment. The fact that they are evaluated in comparison with others in the market may also lead to asset managers adopting herd behaviour, even if they have a different opinion of the current developments in the financial markets. It is better to lose in good company than to stand alone with an investment that might provide a good return in the long-run, but which results in short-term losses. The word might is central here, as no one can predict market developments and it is therefore difficult to go against a trend. Herd mentality can thus lead to asset prices deviating from fundamental economic conditions during a relatively long period of time. The contagion effects can also increase when the view of the world changes. Herd behaviour among market agents does not only involve investing in the same assets. There are signs that this also includes researching information.