Government Assistance to Banks: Pros and Cons

Should the government interfere in the work of banks? This question may seem naive because, for market economies, the answer is obvious.

Giving Money

However, such intervention helps prevent a major collapse of the banking sector, as was the case during the Great Recession of 2007‒2009. Likewise, the banking crisis of 2023 was very quickly resolved thanks to the actions of the government. However, it must be remembered that government assistance to banks can both reduce risks for the financial system and, vice versa, make it more fragile.

Why Are Bank Bailout Programs Needed?

Restoring Justice

Supporters of active government action to support banks in crisis situations insist that banks only play the role of intermediaries:

  • They offer to put money in a savings account for those who have an excess of capital and receive interest as payment for its use.
  • They also provide loans to those who, on the contrary, need additional funds at the moment.

Therefore, if in situations of collapse, you do not save them, it will not be the bankers who will suffer but the people who kept their deposits there.

Countering the Domino Effect

The greatest pessimists in crisis situations recall the Great Depression, when panic in the financial markets led to an outflow of capital from banks. They argue that if the government does not intervene, then the depositors of banks that have not yet been affected will prefer to withdraw their savings just in case. And then, the mass flight of capital will be impossible to stop.

Protection from Global Crises

Banks balance the interests of depositors and borrowers. However, any global cataclysms can seriously undermine this balance. For example, this was the case when, as a result of the Covid-19 pandemic, small and medium-sized businesses began to go bankrupt. They had large amounts of loans from banks and could not repay them. This meant a loss of liquidity for the banks and would put them in an extremely risky situation if depositors wanted to return their capital. Therefore, banks must be protected from such failures that are not the result of their mistakes in capital management.

What Is the Danger of Bank Bailouts?

There are also critics of the idea of bailing out banks, who put forward their arguments against such a measure:

  • The bailout comes at the expense of taxpayers' money.
  • Banks can collude to run fraudulent schemes to get government bailouts.
  • Injecting money into the financial system in the form of bank bailouts increases inflation.
  • Banks are taking the money but blocking other aid programs such as HAMP and HARP, which are aimed at helping individual households.

Alternative to Banks Ways of Saving and Borrowing Money

  • At the moment, there are many other associations, such as thrift institutions, credit unions, etc., which take money from depositors at interest and are often more profitable than banks.
  • The same goes for loans. If you use the services of the Payday Depot platform, you will get access to a huge network of lenders and financial institutions that provide loans.

So, if you doubt the soundness of banks and are not sure that the government will come to the rescue in an emergency, use other options for saving money or obtaining a loan, which often creates more favorable conditions for both borrowing and saving capital.

Skyler Watkins

Skyler Watkins is an aspiring author and editor located in Columbus, Ohio.
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