The topic of loan defaults and their impact on banking stability is a recurring theme in IELTS Writing Task 2 essays. This subject has appeared in various forms over the past few years, reflecting its relevance to global economic concerns. As financial systems become increasingly interconnected, understanding the relationship between loan defaults and banking stability is crucial for policymakers, economists, and informed citizens alike.
Based on recent trends, we can expect this topic to continue appearing in future IELTS exams. To help you prepare, let’s examine a relevant question that has been featured in past tests:
Some people believe that governments should bail out major banks that are at risk of collapse to ensure economic stability. Others argue that banks should face the consequences of their actions without government intervention. Discuss both views and give your own opinion.
Analyzing the Question
This question addresses the complex issue of government intervention in the banking sector, specifically in cases where major banks face potential collapse. It requires candidates to:
- Discuss arguments in favor of government bailouts for banks
- Explore reasons against government intervention
- Provide a personal opinion on the matter
The topic relates directly to the impact of loan defaults on banking stability, as widespread defaults can lead to bank failures and potential economic crises.
Sample Essay 1 (Band 8)
Here’s a high-quality sample essay that would likely score in the Band 8 range:
In recent years, the debate over whether governments should rescue failing banks has intensified, particularly in light of the 2008 financial crisis. While some argue that such interventions are necessary to maintain economic stability, others contend that banks should be left to face the consequences of their actions. In my opinion, a nuanced approach that combines limited government support with stricter regulations is the most effective solution.
Proponents of government bailouts argue that allowing major banks to fail could have catastrophic consequences for the economy. They contend that the collapse of large financial institutions would lead to a domino effect, causing widespread job losses, a credit freeze, and a severe economic downturn. Moreover, supporters claim that the interconnected nature of the global financial system means that the failure of one major bank could trigger a worldwide crisis, justifying government intervention to prevent such a scenario.
On the other hand, critics of bank bailouts argue that these interventions create moral hazard and encourage reckless behavior. They assert that banks, knowing they will be rescued in times of crisis, are more likely to engage in high-risk activities, ultimately leading to more instability in the long run. Furthermore, opponents contend that using taxpayer money to save private institutions is fundamentally unfair and undermines the principles of free-market capitalism.
In my view, a balanced approach is necessary to address this complex issue. While I believe that allowing all banks to fail indiscriminately could indeed lead to economic chaos, unconditional bailouts are equally problematic. Instead, governments should implement a system of limited support coupled with stringent regulations and oversight. This approach would involve providing temporary assistance to systemically important banks, but with strict conditions such as management changes, limits on executive compensation, and mandatory restructuring plans.
In conclusion, the question of whether governments should bail out failing banks is not a simple one. While both sides of the argument have merit, I believe that a carefully calibrated approach that combines limited intervention with increased accountability is the most effective way to ensure long-term economic stability and prevent future crises.
Bank bailout and economic stability concept
Sample Essay 2 (Band 6)
Now, let’s look at a sample essay that would likely score in the Band 6 range:
There is a big debate about whether governments should help big banks that might fail or let them face the results of their actions. Some people think it’s good for the government to help, while others disagree. I will discuss both sides and give my opinion.
People who support government help for banks say it’s important for the economy. They think that if big banks fail, it can cause many problems. For example, people might lose their jobs, and it would be hard for businesses to get loans. Also, they say that because banks are connected around the world, one bank failing could cause problems everywhere.
On the other hand, people against government help for banks have different ideas. They say that if banks know the government will always help them, they might take too many risks. This could make more problems in the future. They also think it’s not fair to use taxpayer money to save private companies.
In my opinion, I think there should be a middle way. The government should help banks sometimes, but not always. They should only help if the bank is very important and if the bank agrees to make changes. For example, the bank should change its leaders and agree to follow new rules.
To conclude, the question of helping banks is complicated. While there are good reasons for both sides, I believe a careful approach with some government help and more rules for banks is the best way to keep the economy stable.
Explanation of Band Scores
Band 8 Essay
This essay demonstrates many qualities of a Band 8 response:
- Task Response: The essay fully addresses all parts of the task, presenting a well-developed response with relevant, extended ideas.
- Coherence and Cohesion: Ideas are logically organized with clear progression throughout. Paragraphs are well-linked, and cohesive devices are used effectively.
- Lexical Resource: A wide range of vocabulary is used accurately and appropriately, with some less common items (e.g., “moral hazard,” “reckless behavior”).
- Grammatical Range and Accuracy: A wide range of structures is used with flexibility and accuracy. Complex sentences are frequent and error-free.
Band 6 Essay
This essay demonstrates characteristics of a Band 6 response:
- Task Response: The essay addresses all parts of the task, but some aspects are more fully covered than others.
- Coherence and Cohesion: There is a clear overall progression, but some ideas may be inadequately developed or unclear.
- Lexical Resource: An adequate range of vocabulary is used for the task, with some attempts at less common vocabulary, though not always successfully.
- Grammatical Range and Accuracy: A mix of simple and complex sentence forms is used, with some errors that do not impede communication.
Comparison of Band 8 and Band 6 IELTS essays
Key Vocabulary to Remember
Bailout (noun) – financial assistance given to a failing business or economy
Pronunciation: /ˈbeɪlaʊt/Intervention (noun) – the action of becoming involved in a situation to improve it
Pronunciation: /ˌɪntərˈvenʃən/Moral hazard (noun) – lack of incentive to guard against risk where one is protected from its consequences
Pronunciation: /ˈmɒrəl ˈhæzərd/Systemic risk (noun) – the possibility that an event could trigger severe instability or collapse an entire industry or economy
Pronunciation: /sɪˈstemɪk rɪsk/Economic stability (noun phrase) – a state of the economy in which there is constant growth and low inflation
Pronunciation: /ˌiːkəˈnɒmɪk stəˈbɪləti/Financial crisis (noun phrase) – a situation in which the value of financial assets drops rapidly
Pronunciation: /faɪˈnænʃəl ˈkraɪsɪs/Regulatory oversight (noun phrase) – supervision by government agencies to ensure compliance with laws
Pronunciation: /ˈreɡjələtəri ˈəʊvəsaɪt/Credit freeze (noun phrase) – a situation where lending between banks or to individuals and businesses stops
Pronunciation: /ˈkredɪt friːz/
Understanding and using these terms correctly can significantly enhance the quality of your essay and demonstrate a strong grasp of the topic.
How credit ratings affect loan approvals is another important aspect to consider when discussing the broader implications of loan defaults and banking stability. Credit ratings play a crucial role in determining the likelihood of defaults and, consequently, the overall health of the banking system.
In conclusion, mastering essays on loan defaults and banking stability requires a deep understanding of economic principles, clear argumentation, and the ability to present balanced views. Practice writing essays on this topic, paying attention to structure, vocabulary, and coherence. Consider exploring related themes such as the role of banks in economic development to broaden your perspective.
For further practice, try writing an essay on the following potential future IELTS question:
“Some economists argue that stricter regulations on banks could prevent future financial crises, while others claim that over-regulation stifles economic growth. Discuss both views and give your opinion.”
Feel free to share your practice essays in the comments section below. This active engagement will help you refine your writing skills and prepare effectively for the IELTS Writing Task 2.