Small retail savers are likely to find it difficult to detect and price for higher risk-taking at a financial institution, although wholesale investors will exert discipline. In addition there are factors that limit the incentive for financial institutions to internalise the costs to society of a financial crisis.
For example, moral hazard can result if institutions believe the taxpayer will bail them out in the event of a crisis. The larger the scale of this distortion, the greater the risk to financial stability and the greater the risk to other regulated entities, investors, depositors and ultimately taxpayers. These structural market failures tend to be reinforced by behavioural factors.