Too Big To Fail and Moral Hazard
Among the reasons for maintaining close regulation of banking institutions is the aforementioned concern over the global repercussions that could result from a bank's failure; the idea that these bulge bracket banks are "too big to fail". The objective of federal agencies is to avoid situations in which the government must decide whether to support a struggling bank or to let it fail. The issue, as many argue, is that providing aid to crippled banks creates a situation of moral hazard. The general premise is that while the government may have prevented a financial catastrophe for the time being, they have reinforced confidence for high risk taking and provided an invisible safety net. This can lead to a vicious cycle, wherein banks take risks, fail, receive a bailout and then continue to take risks once again.
Read more about this topic: Bank Regulation
Famous quotes containing the words big, fail, moral and/or hazard:
“Towns oftener swamp one than carry one out onto the big ocean of life.”
—D.H. (David Herbert)
“A man who speaks out honestly and fearlessly that which he knows, and that which he believes, will always enlist the good will and the respect, however much he may fail in winning the assent, of his fellow men.”
—Thomas Henry Huxley (1825–95)
“The fact that man knows right from wrong proves his intellectual superiority to the other creatures; but the fact that he can do wrong proves his moral inferiority to any creatures that cannot.”
—Mark Twain [Samuel Langhorne Clemens] (1835–1910)
““Who chooseth me must give and hazard all he hath.”
Must give—for what? for lead, hazard for lead?
This casket threatens. Men that hazard all
Do it in hope of fair advantages;
A golden mind stoops not to shows of dross.”
—William Shakespeare (1564–1616)