the message to depositors everywhere, of every size, is "don't worry about your bank's solvency, we'll protect you".
So market scrutiny is removed as a discipline on bank asset strategy.
Uhh.. isn’t that FDIC’s raison d’tere? (Aside from the ‘every size’ part)
Bank runs are caused by low confidence. FDIC makes depositors confident.
It’s also interesting that failure is socialized among banks- who are equipped to judge the risk their peers are taking.