The ability to borrow at a risk-free rate conferred by deposit insurance, combined with the limited liability that is standard in corporate structures, presents banks with incentives to take on socially inefficient risks. This well-known moral hazard problem traditionally has been addressed through regulation and supervision directed specifically at protection of the deposit insurance fund.
Thus, for example, traditional bank holding company regulation was actually fairly narrowly defined: It sought to protect insured depository institutions from the risks of their uninsured affiliates and to limit use of insured deposits to fund activities in other parts of the holding company.