FDIC is protection for the depositors, not the banks, and it was passed back when the people were afraid to put their money in banks. Thanks to the recession, the same fears are alive today. That was why they raised the insurance up to $250,000, to stop possible runs on banks.
ricksfolly
You are correct it's stated purpose is to protect the depositors. and it does or at least has.
However, It has caused several situations.
The natural check on banks over extending themselves is the threat that another bank will orchestrate a run on them and they will not have funds available to cover it. They go out of business, game over.
It didn't take long after the FDIC came along for banks to realize it was a great deal to put others out of business. Not only did it eliminate the competition but they also were able to get the depositors funds at full value. Individuals rarely receive funds from the FDIC. They are deposited into another FDIC bank.
The government realized this was bad. FDIC was having to pay out money to banks that were intentionally causing other banks to fail. They instituted regulations to prevent it from happening. This removed the natural check on the banks.
Now without having to worry about the competition taking them out, banks become free to make irresponsible decisions regarding their funding limits.
In all fairness the FDIC sets limits for these banks but they are lax about enforcement and as with all political decisions, the limits are often set because of political pressure and not by what they realistically should be. This is mostly responsible for huge mega banks we have.
When these poor decisions finally come to a head what happens? The government is on the hook for up to $100,000 for each and every depositor ($250,000 now) if the bank fails.
#1 they don't have the money to cover that.
#2 They don't want to.
So it becomes much cheaper for them "bail out" the bank and allow them to continue to operate, only providing the capital needed at the current time instead of having to pay out an ENORMOUS lump sum to cover the deposits of EVERY customer of the bank in question.
So you and I end up subsidizing the bad decisions of banks so they can continue to operate and make bad decisions under the protection of the government.