When a systemically important bank faces insolvency, its uncoordinated bankruptcy can trigger widespread market disruption. Historically, governments executed taxpayer-funded Bail-outs to prevent a systemic collapse, creating significant moral hazard by encouraging bank executives to pursue high-risk strategies knowing public funds would protect the firm from failure.

Modern crisis management relies on formal bank resolution frameworks (such as the Bank Recovery and Resolution Directive – BRRD in Europe or Title II of the Dodd-Frank Act in the United States). These frameworks give regulatory authorities the statutory power to intervene in a failing institution, restructure its operations, and absorb losses internally without relying on public funds.