But if the issue is one of solvency, then the central bank has no role to play, as taxpayers’ money might be ultimately at stake. Rather, it is then for politicians to decide whether to let a bank fail or not. Providing insurance in the form of a bail-out comes with obvious moral hazard problems.
If banks know that they are too big to fail, they are tempted to make the most of this insurance and take on excessive risks, at the expense of society at large.