In a sense, therefore, regulators inadvertently pointed banks toward these securities. In some ways practices like this are an unavoidable consequence of regulation. If banks have an incentive to take risk, they will always look for opportunities to get the greatest bang for the regulatory buck. But the regulatory mistake of requiring too little capital for certain activities is then compounded because in taking advantage of regulatory mistakes, banks build up exposure to the same risks. The dynamic associated with systemic risk exposures then kicks in: if everyone is exposed to the same risk
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regulators can push banks to all take the same risk if capital requirements are out of sync with the risk premium that the market shows, compounding the systemic risk
