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Strategies & Market Trends : HONG KONG
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To: Ron Bower who wrote (2261)9/1/1998 8:49:00 PM
From: Dayuhan  Read Replies (2) of 2951
 
<<Isn't it better for the governemnt to step in to protect the economy and prevent the insolvency of the banking system than to stay out of the system and have to deal with insolvent banks>>

But if banks know that Government will bail them out if they get in trouble, what incentive do they have to keep their houses in order and limit their risks? If a company pours all its money into developing a product that doesn't sell, should government bail them out? What's the difference between that company and a bank that loans huge sums to excessively leveraged companies with little or no capacity to repay?

There is a distinction that needs to be drawn. Banks that were caught up in circumstances beyond their control might arguably be entitled to a degree of relief. Banks that stuck their necks way out in search of an extra buck need to suffer the consequences.

Exactly where the line lies is another question altogether, and not an easy one.

Steve
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