Raghuram Rajan5 and Jean Tirole 6, amongst others, have convincingly argued that the implicit promise of a central bank to step in by lowering interest rates and injecting liquidity when banks default whets banks' appetite for risk. This also shows that selecting an appropriate strategy for liquidity provision is something of a balancing act.
Being too restrictive in granting liquidity can cause a spark to turn into a fire. Granting liquidity too liberally, on the other hand, and propping up institutions without sustainable business models, may also mean that the water used to extinguish the fire ends up causing more damage than the fire itself.