This view stresses the need for sensible pacing and sequencing of financial reforms. Providers of funds have difficulties monitoring intermediaries, who in turn face the same problem with users of funds. Those recieving funds know better how they will utilize them than the providers, while the exchange of money today for money in the future further complicates the monitoring problem. Thus most bank loan are illiquid and not easily marked to market, making banking, with demandable debt, especially vulnerable to a revaluation of expectations and contributing to its inherent fragility. This feature of banking makes it particularly susceptible to multiple equilibrium.
Information asymmetries and intertemporal trade increase incentive problem in finance.
Bank managers in a perfect information world would find it more difficult to take risks in excess of shareholder's comfort level, and supervisors could intervene in time if they always knew the true net worth of banks. Thus, looting, gambing for resurrection or Ponzi schemes could not occur with perfect information and any reasonable form of corporate governance. Information and incentive problems worsen during the crisis itself, as markets may not distinquish between better and worse banks, and asset prices, which may have been inflated before the crisis, can overshoot their equilibrium as investors rush for the door. While countries are in a 'good' equilibrium, it is perhaps understandable that authorities are not disposed to deal with the weaknesses in their financial systems, even though this is likely the best time to do so.