why buy gold doesn't help a bank, page-9

The argument with Gold is that it is a liquid asset and so can be quickly sold like government bonds (non Greek!!) to raise funds where there is a liquidity crisis so it is more about covering a lack of liquidity rather than a lack of capital due to loan losses. Eg RAMS home loans had to be rescued not because of a lack of capital bit a lack of liquidity - borrowing short to fund 25 year home loans. Notwithstanding, commercial banks will not buy gold due to earnings volatilitu from having to mark to market and also having to hold market risk capital against said volatility.

As to letting banks fail, this is what regulators are aiming at by separating the investment banking activities and trying to stop banks becoming too big to fail. The risk of not letting them fail is that depositors chase the best return and ignore risk and also creating moral hazard where banks chase high risk business.