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:
“However big the fool, there is always a bigger fool to admire him.”
—Nicolas Boileau-Despréaux (1636–1711)
“The purposes of the Almighty are perfect, and must prevail, though we erring mortals may fail to accurately perceive them in advance.”
—Abraham Lincoln (1809–1865)
“The moral sense is always supported by the permanent interest of the parties. Else, I know not how, in our world, any good would ever get done.”
—Ralph Waldo Emerson (1803–1882)
“I, who am king of the matter I treat, and who owe an accounting for it to no one, do not for all that believe myself in all I write. I often hazard sallies of my mind which I mistrust.”
—Michel de Montaigne (1533–1592)