Banks take on risks when they make loans. Some loans are ris…
Banks take on risks when they make loans. Some loans are riskier than others. That is, some borrowers are more likely to repay their loans than are other borrowers. Suppose that riskier loans have higher expected payments to the bank (if the riskier borrowers do repay, they repay more than the less risky borrowers do). If the risks undertaken by large banks in the US are not borne solely by owners of the banks (they’re “too big to fail”) and the government bails out these banks whenever they get in financial trouble because of bad loans, from society’s perspective, ________.