Question 1
Statement: A major bank is on the verge of collapse due to bad loans and mismanagement, threatening to trigger a systemic financial crisis affecting millions of depositors and the broader economy.
Course of Action:
I. The government should provide emergency bailout funds to prevent collapse.
II. Bank management should be replaced and independent auditors appointed.
III. Depositor funds should be protected through deposit insurance mechanism.
IIII. The bank should be allowed to fail to maintain market discipline.
IIIII. Bad loans should be transferred to a separate asset reconstruction company.
IIIIII. Criminal investigation should be initiated against responsible executives.
Action I prevents systemic contagion - the 'too big to fail' doctrine applies when broader economic stability is at stake. Action II ensures accountability and competent management. Action III protects innocent depositors from losses. Action V segregates toxic assets for specialized recovery. Action VI ensures legal accountability for wrongdoing. Action IV ignores systemic risk - while market discipline is important, allowing major bank failure during crisis can cause financial system collapse affecting millions; controlled resolution is preferable. Financial Crisis Management: Systemic stability (I, III) + Accountability (II, VI) + Asset quality (V) vs. Ideological purity (IV). Moral Hazard vs. Systemic Risk: While IV addresses moral hazard, it ignores larger systemic risk in crisis situations. Balanced approach: Stabilize (I, III, V) + Reform (II) + Punish (VI). Stakeholder Protection: I, II, III, V, VI protect depositors and economy; IV sacrifices both for abstract principle. Historical Evidence: 2008 financial crisis demonstrated catastrophic consequences of major bank failures; controlled interventions (I-III, V) with accountability (II, VI) are evidence-based responses.