Two sample passages from the above text support the idea that regulatory activity is essential because of the habit of banks to get themselves into financial trouble.

In stock market bubbles:

"Mishkin and White’s data indicate that in the history of U.S. stock crashes many stock market bubbles have burst (for example, in 1946, 1962, and 2000) without causing financial instability. This has been especially true in cases where bank balance sheets and the financial system were sound before the onset of crashes. The authors conclude that the critical question facing monetary policymakers is not whether a stock market crash is coming or can be prevented, but whether financial instability is present. Central banks are therefore advised to focus their policy responses on financial regulatory measures that ensure the robustness of banking systems."

And in real estate bubbles:

"The authors offer several explanations as to why banks expose themselves to this increasing degree of risk: disaster myopia, perverse incentives (high leverage, implicit insurance, herd behavior, principal agent conflicts), short-term players, poor data, and inadequate analysis.

The policy implications of these three models suggest several courses of action to address the problem of potentially destabilizing asset price cycles. The models of Cochrane and De Bondt suggest that a key role of policymakers is to improve the quality and quantity of information and transparency in order to minimize information gaps. Their models also suggest that boom and bust cycles are not easily identified ex ante. Herring and Wachter’s model suggests that monetary policymakers should not expand credit too rapidly and that financial regulatory policies should take an active role in restricting the potentially hazardous, seemingly irrational, risk taking in real estate markets."

In my eyes, this means that markets are sometimes more myopic than policymakers, especially when we deal with civil servants and not with politicians. Markets are not very good in preventing herd behavior. The government may sometimes do a better job at that.