And they might come to believe that the government possesses more tools and resources than are actually available to shield them from the consequences of poor risk management. The central bank can draw from a menu of actions that involve varying degrees of moral hazard.
Those actions range from loans to individual institutions that otherwise would not have access to credit, to moral suasion, to open market operations, which allow the markets to distribute credit and should not cause distortions in private-sector decisionmaking. Heightened uncertainty is the key characteristic of episodes of financial instability.