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:
“When a toddler uses profanity, don’t make a big deal about it. If you do, you give the child more power. After all, it’s only a word—one that won’t do much harm to anybody. In fact, if you think about it, a nasty word is a step up from hitting or biting someone. So look at it as a sign of growth.”
—Lawrence Balter (20th century)
“Peace can endure only so long as humanity really insists upon it, and is willing to work for it and sacrifice for it. Twenty- five years ago American fighting men looked to the statesmen of the world to finish the work of peace for which they fought and suffered; we failed them, we failed them then, we cannot fail them again and expect the world to survive again.”
—Franklin D. Roosevelt (1882–1945)
“When the masculine mystique is pulling boys and men out into the world to growl manly noises at one another, the only power with a stronger pull on the male psyche is maternally induced guilt. The guilt is quite necessary for our moral development, but it is often uncomfortable.”
—Frank Pittman (20th century)
““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)