Deposit insurance

What deposit insurance does is protect the depositors, not the bank. So depositors don’t have any worries about which bank they deposit money into and aren’t a check and balance with regard to bank safety. What this gives the bank is a steady supply of low cost capital from which they can profit. If risk was taken into account, they would have to pay depositors a much higher rate of interest and they wouldn’t be nearly as profitable. This is essentially a federal subsidy for banks.

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