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:
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—Fran Sussner Rodgers (20th century)
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—Stephanie Coontz (20th century)
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—Mason Cooley (b. 1927)
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Must give—for what? for lead, hazard for lead?
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Do it in hope of fair advantages;
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—William Shakespeare (1564–1616)