<p>There were two substantial reasons why Britain <a href="http://www.theguardian.com/politics/2010/feb/21/gordon-brown-saved-banks" rel="nofollow">led</a>, and the world followed, in recapitalising the banking system.</p>

<p>The first is that a very large proportion of citizens' money on deposit at banks is protected by the State anyway, so the State was already liable for that cost.</p>

<p>The second is that the banks are responsible for carrying a very large proportion of transactions. And if a bank can't deal with other banks, either because it's insolvent or because it presents significant counter-party risk, it ceases to be part of the global network of transactions. If that network jams up, then a huge chunk of global economic activity ceases, both within the affected countries, and between them and the rest of the world. The consequential global depression would have been much deeper, and potentially even longer, than what came about.</p>

<p>There are a bunch of other things that happened, that needn't; and they made things worse (e.g. the open-ended bailout of bank bond-holders). And there were things that could have been done, that would have made things better, quicker, that weren't (e.g. the cancelling of the personal debts that triggered the massive liquidity crunch in the collateralised-debt markets). But in terms of the lessening of a global economic disaster, bank recapitalisation was very effective.</p>

CC BY-SA 3.0
2015-07-25T07:20:51.863Z
2015-07-25T07:20:51.863Z
410 gone
<p>Because the banks are not loaning their own money but that of depositors. One may also argue that the depositors should know the risks and if their bank makes bad investments it is partly their fault so they cannot complain should they lose their deposits. But a functioning banking system is essential to the current economic system. The bankruptcy of a big bank would cause panic and banks runs, which because of fractional reserve banking would probably result in the insolvency of other banks, banks that perhaps made good investments but ones that cannot immediately be liquidated. After the closing of the banks considerably less savings would be deposited in financial institutions. This will hinder consumption because credit/debit card traffic would cease and getting investment funds would also be considerably more difficult.</p>

<p>So the governments have considered the damage the bankruptcy of a bank would cause to their economy and decided it is better to bail them out. ("Too big to fail.") Of course since banks have a very large revenue stream they can also afford lobbying for intervention as well, but this does not mean that the intervention is not beneficial to the public. Furthermore, if you lose your deposits you may very well (wrongly) blame the government, so a bail-out is also politically prudent.</p>

<p>If you are interested in what could be done I recommend reading about the <a href="https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislation" rel="nofollow">Glass-Steagall act</a>.</p>

<p>If you are not satisfied with my answer there are any number of conspiracy theories that offer unconvincing alternative explanations.</p>

CC BY-SA 3.0
2015-07-24T20:10:11.193Z
"Because the banks are not loaning their own money but that of depositors"
Nop, they loan the money they borrow at central banks.
agemO
CC BY-SA 3.0
2015-07-24T20:16:19.793Z
I want to comment the same statement as agemO commented. I've heard that banks had to pay debts to financial markets (example: PIMCO), so maybe they got money from there? I might make that a new question.
Joe Jobs
CC BY-SA 3.0
2015-07-24T20:16:26.413Z
If a part of their money is made of deposit, then the governments could only give them the amount of the deposit
agemO
CC BY-SA 3.0
2015-07-24T20:35:24.517Z
It's quite hard do believe that you can make the banking system a "functioning banking system" when you sponsor incompetents, keeping them into business and preventing those who can do competent business to replace the incompetents. In case of bankruptcy, the majority of the people have not much to lose in deposits, only the rich can lose a lot of money. The average Joe Sixpack is covered by the deposit insurance (100,000 Euro) anyways. If the government doesn't want panic and bank runs, they should put credible restrictions in place instead of rewarding the incompetents.
Joe Jobs
CC BY-SA 3.0
2015-07-24T20:38:14.370Z
Your answer was not convincing me of anything but I needed to know the government's justifications not to be convinced. I think your answer is quite good in presenting their point of view, so you got my vote. You have my sincere thanks.
Joe Jobs
CC BY-SA 3.0
2015-07-25T06:00:05.420Z
Well if the bank system is not functioning I guess I should be very happy that my transactions still get through. @agemO I encourage you to make your own answer, but not about what should be, rather about what is. A good basis for that would be looking at some balance sheets to see where the money comes from:
http://www.bankia.com/en/who-we-are/about-us/key-figures/
Giskard
CC BY-SA 3.0
2015-07-25T13:10:15.220Z
As @denesp states banks loan depositors ' money. Although central bank contains the "bank " it is mainly a regulatory institution.
AnilB
CC BY-SA 3.0
2015-07-25T20:40:16.620Z
"Rather than banks receiving deposits when households
save and then lending them out, bank lending creates
deposits"  from Bank of England quarterly bulletin. So banks don't loan customer deposit ? Is the case shown by denesp a special case ?
agemO
CC BY-SA 3.0
2015-07-25T21:29:35.253Z
@agemO actually if you read the sentence again you will realize that the bank did lend a customer's deposit - to the customer herself. If you take out a business loan, but initially only take $10\%$ of in cash the rest is still deposited in the bank. Should the bank go bankrupt you can still lose $90\%$ of the money (depending on the legal framework of your loan). Unfortunately this is my final remark in this thread because I think (perhaps I am wrong) that you are not interested in our answers, only in your own conviction.
Giskard
CC BY-SA 3.0
2015-07-26T03:37:03.773Z
@agemO of course banks lend out deposits - what else are they going to do with them - just sit on them and make a loss on every one? Please do read the rest of that bulletin, rather than just extracting single sentences out of context.
410 gone
CC BY-SA 3.0
2015-07-26T11:18:21.577Z
I have no conviction, it's a fact and a simple question, so is money lent by private bank mainly coming from their customer deposit or from what they borrow from central banks ?
agemO
CC BY-SA 3.0
2015-07-26T11:23:49.703Z
Of course they loan it, but if they have 10€ from customer deposit, then they can borrow 100€ to central bank and loan 110€ so that money is not mainly coming from customer deposit anymore. That's what I have been told by economic teachers, and now you're saying the opposite, so I just want to have a clear answer to such a simple question.
agemO
CC BY-SA 3.0
2015-07-24T20:04:31.883Z
2015-07-25T06:00:52.767Z
2015-07-25T06:00:52.767Z
Giskard
<p>If the private banks never learn from history and keep giving credits to it's clients for overpriced acquisitions, and then they enter default why would the government give them free money or buy those banks?</p>

<p>If I buy overpriced apples to sell them in my fruit shop and I fail to sell them, the government will not bail me out and pay my debts.</p>

<p>Just as my company running the fruit shop should go bankrupt, those banks should go bankrupt, other private investors should buy their assets and start doing better banking business, removing that incompetent staff who buy (or give credits for buying) overpriced things (in this case: houses).</p>

<p>On a first thought, that's my conclusion. And also on a second and third thought.</p>

<p>The whole point of default and bankruptcy should be to allow those competent businesses to survive and those incompetent to leave the sector and do something else. And that looks like a fundamental piece of a working capitalist system that encourages the players to be competitive. Therefore the bailout of private banks looks like a bonus for incompetence. Sponsoring incompetents doesn't look like a good option for making the banking sector work well and totally not suitable for restoring confidence of customers in such banks.</p>

<p>Example: If Compaq is selling bad computers and Gateway is selling good computers, then Compaq should go bankrupt instead of getting government subsidies in order to keep being incompetent. Their owners can try to do something else, like for example Barbie toys, maybe they can do it better than making computers. Gateway will buy their assets and they will survive and grow because they are competent.</p>

<p>I would like to know the arguments used by the governments for bailing out the banks, like for example in Spain where they gave <a href="http://www.theguardian.com/business/2012/jun/11/question-answer-spain-banking-bailout" rel="nofollow">100 billion Euro</a> for the private banks.</p>

<default>
Why would a government bail out private banks?
Joe Jobs
# Why would a government bail out private banks?

(Asked by: username_0 on 2015-07-24)

If the private banks never learn from history and keep giving credits to it's clients for overpriced acquisitions, and then they enter default why would the government give them free money or buy those banks?

If I buy overpriced apples to sell them in my fruit shop and I fail to sell them, the government will not bail me out and pay my debts.

Just as my company running the fruit shop should go bankrupt, those banks should go bankrupt, other private investors should buy their assets and start doing better banking business, removing that incompetent staff who buy (or give credits for buying) overpriced things (in this case: houses).

On a first thought, that's my conclusion. And also on a second and third thought.

The whole point of default and bankruptcy should be to allow those competent businesses to survive and those incompetent to leave the sector and do something else. And that looks like a fundamental piece of a working capitalist system that encourages the players to be competitive. Therefore the bailout of private banks looks like a bonus for incompetence. Sponsoring incompetents doesn't look like a good option for making the banking sector work well and totally not suitable for restoring confidence of customers in such banks.

Example: If Compaq is selling bad computers and Gateway is selling good computers, then Compaq should go bankrupt instead of getting government subsidies in order to keep being incompetent. Their owners can try to do something else, like for example Barbie toys, maybe they can do it better than making computers. Gateway will buy their assets and they will survive and grow because they are competent.

I would like to know the arguments used by the governments for bailing out the banks, like for example in Spain where they gave [100 billion Euro](http://www.theguardian.com/business/2012/jun/11/question-answer-spain-banking-bailout) for the private banks.

**Tags:** default

---

## 2 answers

### Answer by username_2 on 2015-07-24. Score: 3 | Accepted answer

Because the banks are not loaning their own money but that of depositors. One may also argue that the depositors should know the risks and if their bank makes bad investments it is partly their fault so they cannot complain should they lose their deposits. But a functioning banking system is essential to the current economic system. The bankruptcy of a big bank would cause panic and banks runs, which because of fractional reserve banking would probably result in the insolvency of other banks, banks that perhaps made good investments but ones that cannot immediately be liquidated. After the closing of the banks considerably less savings would be deposited in financial institutions. This will hinder consumption because credit/debit card traffic would cease and getting investment funds would also be considerably more difficult.

So the governments have considered the damage the bankruptcy of a bank would cause to their economy and decided it is better to bail them out. ("Too big to fail.") Of course since banks have a very large revenue stream they can also afford lobbying for intervention as well, but this does not mean that the intervention is not beneficial to the public. Furthermore, if you lose your deposits you may very well (wrongly) blame the government, so a bail-out is also politically prudent.

If you are interested in what could be done I recommend reading about the [Glass-Steagall act](https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legislation).

If you are not satisfied with my answer there are any number of conspiracy theories that offer unconvincing alternative explanations.

> **Comments:**
> **username_3**: "Because the banks are not loaning their own money but that of depositors" Nop, they loan the money they borrow at central banks.  
> **username_0**: I want to comment the same statement as agemO commented. I've heard that banks had to pay debts to financial markets (example: PIMCO), so maybe they got money from there? I might make that a new question.  
> **username_3**: If a part of their money is made of deposit, then the governments could only give them the amount of the deposit  
> **username_0**: It's quite hard do believe that you can make the banking system a "functioning banking system" when you sponsor incompetents, keeping them into business and preventing those who can do competent business to replace the incompetents. In case of bankruptcy, the majority of the people have not much to lose in deposits, only the rich can lose a lot of money. The average Joe Sixpack is covered by the deposit insurance (100,000 Euro) anyways. If the government doesn't want panic and bank runs, they should put credible restrictions in place instead of rewarding the incompetents.  
> **username_0**: Your answer was not convincing me of anything but I needed to know the government's justifications not to be convinced. I think your answer is quite good in presenting their point of view, so you got my vote. You have my sincere thanks.  
> **username_2**: Well if the bank system is not functioning I guess I should be very happy that my transactions still get through. @agemO I encourage you to make your own answer, but not about what should be, rather about what is. A good basis for that would be looking at some balance sheets to see where the money comes from: http://www.bankia.com/en/who-we-are/about-us/key-figures/  
> **username_4**: As @denesp states banks loan depositors ' money. Although central bank contains the "bank " it is mainly a regulatory institution.  
> **username_3**: "Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits"  from Bank of England quarterly bulletin. So banks don't loan customer deposit ? Is the case shown by denesp a special case ?  
> **username_2**: @agemO actually if you read the sentence again you will realize that the bank did lend a customer's deposit - to the customer herself. If you take out a business loan, but initially only take $10\%$ of in cash the rest is still deposited in the bank. Should the bank go bankrupt you can still lose $90\%$ of the money (depending on the legal framework of your loan). Unfortunately this is my final remark in this thread because I think (perhaps I am wrong) that you are not interested in our answers, only in your own conviction.  
> **username_1**: @agemO of course banks lend out deposits - what else are they going to do with them - just sit on them and make a loss on every one? Please do read the rest of that bulletin, rather than just extracting single sentences out of context.  
> **username_3**: I have no conviction, it's a fact and a simple question, so is money lent by private bank mainly coming from their customer deposit or from what they borrow from central banks ?  
> **username_3**: Of course they loan it, but if they have 10€ from customer deposit, then they can borrow 100€ to central bank and loan 110€ so that money is not mainly coming from customer deposit anymore. That's what I have been told by economic teachers, and now you're saying the opposite, so I just want to have a clear answer to such a simple question.  

---

### Answer by username_1 on 2015-07-25. Score: 3

There were two substantial reasons why Britain [led](http://www.theguardian.com/politics/2010/feb/21/gordon-brown-saved-banks), and the world followed, in recapitalising the banking system.

The first is that a very large proportion of citizens' money on deposit at banks is protected by the State anyway, so the State was already liable for that cost.

The second is that the banks are responsible for carrying a very large proportion of transactions. And if a bank can't deal with other banks, either because it's insolvent or because it presents significant counter-party risk, it ceases to be part of the global network of transactions. If that network jams up, then a huge chunk of global economic activity ceases, both within the affected countries, and between them and the rest of the world. The consequential global depression would have been much deeper, and potentially even longer, than what came about.

There are a bunch of other things that happened, that needn't; and they made things worse (e.g. the open-ended bailout of bank bond-holders). And there were things that could have been done, that would have made things better, quicker, that weren't (e.g. the cancelling of the personal debts that triggered the massive liquidity crunch in the collateralised-debt markets). But in terms of the lessening of a global economic disaster, bank recapitalisation was very effective.


---

