Unlike the note-holders and depositors of earlier years, insured bank depositors, who know that their funds are protected even if their bank fails, have little or no incentive to evaluate the risk-taking activities of their bank.
In the absence of other measures, this safety net reduces the restraint that creditors would otherwise place on unsound lending because the insurance reduces the amount of money they have at stake. The tendency of banks to take on excessive risks when they face little economic penalty for doing so is an example of what economists call a moral hazard problem.