One of the specific goals for central bankers is financial s

One of the specific goals for central bankers is financial system stability. Considering the U.S., for example, would this imply that the Federal Reserve would always take action to prevent any single bank from failing? Explain.

Solution

Federal reserve takes action to prevent banks from failing because:
1. If banks fail public money is at huge risk and it might wipe out the savings of the public.
2. Banks take debt from other banks and the failure of one bank might put other banks in risk and as a result the entire economy might be in trouble.
3. A bank failing can cause increase in unemployment because lot of industries and banks are dependent on bank.
4. The industries which are associated with the bank will face huge crisis too.

The Federal reserve take certain measures to bail out banks because of aforesaid reasons:
1. The Federal Reserve provides fund to recapitalizes the banks and prevent them from failing.
2. By performing Open Market Operation the Federal reserves can inject cash and liquidity in the failing banks
3. The government declares and provides special stimulus package which is given to the banks to not only recover from bad debts but also to drive the economy forward.

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