Bubbles and crises

In recent financial crises a bubble, in which asset prices rise, is followe d by a collapse and widespread default. Bubbles are caused by agency relati onship in the banking sector. Investor; use money borrowed from banks to in vest in risky assets, which are relatively attractive because investors can avoid losses in low payoff states by defaulting on the loan. This risk shi fting leads investors to bid up the asset prices. Risk can originate in bot h the real and financial sectors. Financial fragility occurs when positive cr edit expansion is insufficient to prevent a crisis.