> If the insurance is correctly priced then the banks that don't pass the cost of risk on to customers should be able to compete nicely against the ones that tr

> If the insurance is correctly priced then the banks that don't pass the cost of risk on to customers should be able to compete nicely against the ones that try to. This theory breaks down if you distinguish between banker and bank as per the article. In the short term, the crooked banker with insurance can out-compete the honest uninsured banker by making high risk loans, not caring if the loans are paid back. In the short term the crooked banker can accumulate tens or hundreds of millions of dollars and happily retire when in the long term the loans fail and the bank goes bankrupt. The honest banker has to explain to his share holders etc. why crooked banker's bank is growing so much faster than his bank. His borrowers have to compete for houses against borrowers from crooked bank who can borrow more and therefor pay more for houses. His "under-performing" bank may become an acquisition target of crooked bank. The requisites for this dynamic are the absence of fear of criminal prosecution and perverse incentives via excessive CEO compensation.