Question

Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer

a)The bank failure usually leads to a government bailout.
b)There are fewer steel manufacturers than there are banks.
c)The large bank failure reduces credit availability throughout the economy.
d)Since the steel company's assets are tangible, they are more easily reallocated than assets.

Answer 1

The failure of a large bank affects the entire economy by reducing credit availability and transaction safety, which in turn can lead to a recession, unlike the more contained impact of a large steel manufacturer's failure.

Step-by-step explanation:

The failure of a large bank is more detrimental to the economy compared to a large steel manufacturer because a bank's failure has far-reaching impacts on the entire financial system. Banks are fundamental in facilitating transactions and providing credit availability through the process of making loans. When banks are under financial stress and unable to lend, this restricts the flow of money to sectors that rely on borrowed funds such as business investment, home construction, and car manufacturing.

During the 2008-2009 Great Recession, the risk associated with concentrated banking sectors became evident. Many large banks and investment firms faced bankruptcy due to a widespread decline in the value of their assets, which reduced the safety and convenience of transactions and led to a shrinkage in available loans. This, in turn, caused a sharp decline in aggregate demand and led to a severe recession.

The central bank has the responsibility to ensure the stability of the money supply and the banking system. When large banks fail, the associated decline in economic stability and the reduction of credit can lead to deep economic contractions and potentially necessitate government bailouts.