The problem is that you are trading institutional risk (your local bank goes out of business) for systemic risk (the entire financial system goes under). There

The problem is that you are trading institutional risk (your local bank goes out of business) for systemic risk (the entire financial system goes under). There are other ways to mitigate that institutional risk. Such as FDIC insurance. And the availability of securitization for loans. The bank makes the loan, sells it off to Wall St, where it becomes part of a bond deal. And now the bank is insulated from default risk, and can make another loan. Before securitization, when a local crash hit, lending became hard, and the downturn would stretch out. After securitization, towns began to bounce back more quickly after local hard times (eg a factory closing). On the other hand "too big to fail" is a huge problem with the biggest banks. And regulation stops being meaningful when the institutions engage in regulatory capture. As an example, in the leadup to 2008, a ton of new financial regulations were enacted. But all benefited the same 5 Wall St firms. Who, when they ran into trouble, nearly destroyed our financial system. (I know people think it was overblown. But we were actually within 1 day of "ATMs will stop working" when TARP was passed.)