Put another way, deposit insurance misallocates resources by breaking the link between risks and rewards for a select set of market competitors. In sum, from the very beginning, deposit insurance has involved a tradeoff. Deposit insurance contributes to overall short-term financial stability and the protection of small depositors.
In some respects, these legislative events contrast sharply with the action taken at the beginning of the 1990s to address weaknesses in banking and the bank supervisory process and reflect a much higher level of comfort with the industry’s financial condition and risk management techniques.