"[In his book Fragile By Design, one of the things the author Charles Calomiris] points out is that the demand for deposit insurance didn’t come from ordinary people. It was a piece of special interests legislation created in response to lobbying from members of the banking industry.
It turns out, when consumers don’t have an expectation that the government will bail them out, they actually do scrutinize financial institutions for security, and they were good at it. So good, in fact, that less secure and riskier financial institutions lobbied for deposit insurance because they didn’t want to have to keep competing for consumers along the dimension of risk.
Deposit insurance was created for the explicit purpose of making sure that being safe and low risk would no longer provide you with a competitive advantage with the consumers."
https://www.econlib.org/nice-vaccine-pity-theres-no-distribution-mechanism/#comment-264790
It turns out, when consumers don’t have an expectation that the government will bail them out, they actually do scrutinize financial institutions for security, and they were good at it. So good, in fact, that less secure and riskier financial institutions lobbied for deposit insurance because they didn’t want to have to keep competing for consumers along the dimension of risk.
Deposit insurance was created for the explicit purpose of making sure that being safe and low risk would no longer provide you with a competitive advantage with the consumers."
https://www.econlib.org/nice-vaccine-pity-theres-no-distribution-mechanism/#comment-264790