Preparing for the Next Financial Crisis

Financial cycles and crises 37

2.2.2 Drivers of nancial cycles

Why do nancial booms often turn to bust and cause serious nancial and

macroeconomic strains? According to Borio (2014), nancial cycles refer to the

self- reinforcing interactions between perceptions of value and risk, risk- taking

and nancing constraints, often in combination with nancial innovation.

Indeed, if risk management, prudential regulation, and oversight fail to keep

up, nancial innovation–such as securitization (2.2.2.1) and shadow banking

(2.2.2.2)–may help to feed the boom and subsequent bust (see Box 2.1: the

unfolding of the GFC). Structural weaknesses such as high leverage (Chapter 1)

and unstable and run- prone funding patterns (2.2.2.3) may also a