In the run-up to the crisis, a basic failing in many of the models used by banks to manage risk was that they reinforced, rather than challenged, the over optimism in the boom.

There are other examples, but this article focuses on one in particular: point-in-time models for internal ratings based, or IRB, loan portfolios.

The probability of default for loans such as mortgages is very low in booms for all types of loan. This meant that for banks with point in time models, the absolute risk on the