Creditors and managers of firms who anticipate such support may not price into their credit or investment decisions the full risk associated with those decisions. As a result, the firms may become more leveraged and thus still larger, an outcome that would only reinforce the belief that the government will not allow them to fail.
The consequence can be both a competitive funding advantage for these large firms and more underlying risk to the financial system. Important as it is, moral hazard is not the only worry engendered by very large, highly interconnected firms in financial markets.