A bank bailout is a form of financial action in which one institution, typically a governmental body, assists a bank financially to prevent it from failing. This is usually done through monetary loans in the form of purchases of securities or stocks offered by the bank. While the nature of such financial assistance can vary quite a bit, there are usually terms for how and when the bank must pay back the loan. A bank bailout can be quite controversial, however, as some believe it can create an environment in which banks and other institutions may take unnecessary risks without fear of potential consequences.
The term “bank bailout” is often used in any instance in which a group provides financial assistance to a bank to keep that bank from closing or failing. This is often used to refer to actions by a government agency, as governments are often the only institutions with sufficient funds to help failing banks. While many people think of a bailout as a means to keep a bank or other business from failing, bailouts can also be used to allow a business to fail with less impact on the economy. This means that a bank bailout could still result in a bank going under, but doing so in a way that does not have disastrous consequences for other banks or customers.
A bank bailout usually consists of purchases of stocks or securities offered by a bank by another business or government office. This effectively acts as a loan made by that business or country to the bank. When this bailout is arranged, an agreement is typically reached between the bank and the lender as to the terms by which the loan must be paid back. The repayment of a bank bailout can take several months or years, and may include interest to penalize the bank once it recovers.
Proponents of a bank bailout often insist that such actions protect the larger economy, by maintaining stability and security for large economic institutions. Those opposed to such bailouts, however, argue that they can promote unhealthy behavior on the part of banks and other financial organizations. They argue that once a bank has been rescued, the managers of that bank may take unnecessary risks in the future, feeling secure in the knowledge that it will be rescued again if the risks do not pay off. Opponents often argue that this can lead to worse economic disasters in the future, as greater risks are taken resulting in even more dire consequences.