Part of this sense of assurance comes from the enhanced prudential supervision of banking organizations required both to protect the government's interest as insurer and to replace the market discipline that bank management and depositors themselves used to provide but feel they no longer need, given the perceived guarantees of the safety net and supervision.
A kind of vicious circle of government replacement of market oversight has been clearly set in motion. The result is a distortion in real resource allocation in our economy. The safety net enables banks to accumulate larger, riskier asset portfolios than would be possible in an intermediation process driven solely by market forces.