Question

What are the disadvantages of using loans to financial institutions to prevent bank panics?

Short answer

Providing loans to financial institutions creates a Moral hazard problem

Step-by-step solution

Step 1. Given Information

The utilization of advances to forestall bank frenzies is an unsafe strategy that turned out to be more obvious following the $2008$monetary emergency.

Step 2.Explanation

While advances in all actuality do offer a fast imbuement of fluid money, monetary establishments that assume those advances frequently disapprove of arranging, the board, and resource control. With the affirmations that the Fed gives, banks have a motivation to assume less secure advances prompting an ascent in the ethical risk quandary for bigger banks. We saw this with the $2008$monetary emergency and the huge banks that were considered "too huge to even think about fizzling".

Step 3.Final answer

With this ascent in moral risk issues, banks can exchange each other garbage to expand their asset reports. As these garbage bonds mature and neglect to be reimbursed, the banks are given the shaft and build terrible obligation. A progression of these defaults can make banks fall flat and lead to gigantic bank panics. For this reason The Fed attempts to go about as a loan specialist after all other options have run out. Assuming they keep on rescuing banks, the citizen is the person who needs to pay.