Question

Which of the following statements is correct?

Banks that are ‘too big to fail’ are careful not to make risky loans.

The problem with the credit market is that rich people will always get a loan irrespective of the quality of their project.

Banks are described as ‘too big to fail’ when their large size makes them safe institutions.

It is easier for rich people to get loans because they are able to provide equity or collateral.

Answer 1

• Banks that are 'too big to fail' also makes mistakes and gives out risky loans. In most of the cases, such Banks receive help from the government to tide over losses arising from such loans.
• The quality of the project is evaluated by the Banks irrespective of the wealth of the rich people demanding loan. It is in the direct interest of the Banks to verify the quality and minimize the incidence of risk.
• Banks become too big to fail when they are so large interconnected that their failure would be a catastrophe for the economy. This does not necessarily make them safe institutions.
• Loans require collateral as a safety measure against the defaulter. It is easier for rich people to show such equity or collateral than poor people who are asset-poor. Therefore, this statement 'It is easier for rich people to get loans because they are able to provide equity or collateral.' is true.