One could think of it as the FDIC stepping in to solve the prisoners’ dilemma. While depositors may only face theoretically tiny losses, the ones exiting first

One could think of it as the FDIC stepping in to solve the prisoners’ dilemma. While depositors may only face theoretically tiny losses, the ones exiting first get paid in full, while the ones staying are left holding the bag. It’s a small cost to the other banks to backstop the bank run through FDIC, compared to potentially costly capital raises they may have to go through if there is a systemic loss of confidence. The downside is the moral hazard: will depositors think they have implicit unlimited insurance from now on?