The government's too-big-to-fail policy:

Question

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The government's too-big-to-fail policy reduces the risk faced by depositors with accounts exceeding $250,000. This is because the policy assures them that their deposits are safe even if the bank fails, as the government will step in to bail out the bank. This reduces the incentive for these depositors to withdraw their funds from the bank, even if they are concerned about the bank's risk profile. This, in turn, makes it easier for the bank to borrow and raises the level of risk it is willing to accept. However, this policy also increases the moral hazard problem of insuring large banks, as it encourages them to take on more risk than they otherwise would, knowing that the government will bail them out if they fail.

The Government's Too-Big-To-Fail Policy