This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

Does the Government Help or Hinder Moral Hazard

Have you ever considered how your client's trust in the government could inadvertently fuel risky behavior from them and the very institutions “safeguarding” some of their assets?

As depositors, your clients' confidence in government-backed insurance may inadvertently encourage both them and the institutions where they hold their funds to take on excessive risks, potentially threatening the stability of the entire financial system.

The situation has a name, which I will discuss as soon as I explain why I am writing this article.

It Happened on Friday

On Friday, April 26, 2024, the Federal Deposit Insurance Corp. (FDIC) announced the seizure of the Philadelphia-based Republic Bank. According to the agency, Fulton Bank, headquartered in Lancaster, Pennsylvania, has agreed to take on nearly all failed bank deposits and acquire virtually all of its assets.

Once again, the FDIC has found a bank to take the deposits with no loss to the depositors. There were five bank failures in 2023(1), and Republic Bank was the first in 2024(2), all with happy endings. However, caution needs to be exercised. This is where the concept of Moral Hazard steps in.

Moral Hazard for Depositors

For depositors, moral hazard is when they trust that their deposits are fully insured by the FDIC or that the FDIC will arrange for their deposits to be transferred to another bank. This might lead to a sense of security, causing depositors to be less vigilant about their bank's financial health and risk-taking.

Said differently, the belief that all their deposits are protected may incentivize your clients to deposit money in banks with riskier profiles without adequately assessing those associated risks. They believe they will be protected from the negative consequences of their actions.

Just as my love for pizza might lead me to believe that nothing bad will happen if I grab that extra slice despite the potential health risks, moral hazard similarly involves the perception that there are no consequences for taking risky actions, even when adverse outcomes are possible.

Moral Hazard for Banks

On the flip side, banks may yield to moral hazard when they perceive that their actions have limited consequences due to government intervention or bailouts. The expectation of a government rescue in the event of failure leads banks to engage in overly risky practices, such as making loans to borrowers with weak creditworthiness or investing in speculative assets.

Moral Hazard might lead to imprudent risk-taking behavior among executives and employees. When a decision-maker believes they will not bear the full costs of their actions and possibly negative outcomes, they may prioritize short-term gains over long-term stability, ultimately putting the institution and its depositors at risk.

 Adem Tumerkan wrote an outstanding article about the headwinds some banks face today. It is required reading if you want a perspective on this potential crisis developing. You can read it here.

Do Not Panic

Please understand I am not trying to create unnecessary alarm or panic. It is important to provide a fair and balanced perspective. According to MoneyWatch, the likelihood of losing money held at a bank is exceptionally low. They report that less than 7% of bank failures since the beginning of 2007 have resulted in losses for uninsured depositors.(3)

In my view, 7% is a reassuring number only when it is not your deposit over the FDIC limits that were not covered by FDIC insurance. Based on my research, there have been 567 bank failures since 2001, and 19 banks with no knight in shining armor saving depositors above the insurance limits.(4)

Bank Name, City, State

Closing Date

Approx. Asset (Millions)

Approx. Deposit (Millions)

The Community's Bank, Bridgeport, CT




NOVA Bank, Berwyn, PA




New City Bank, Chicago, IL




Home Savings of America, Little Falls, MN




First Arizona Savings, A FSB, Scottsdale, AZ




Ideal Federal Savings Bank, Baltimore, MD




Arcola Homestead Savings Bank, Arcola, IL




Lakeside Community Bank, Sterling Heights, MI




Advanta Bank Corp., Draper, UT




Platinum Community Bank, Rolling Meadows, IL




Community Bank of West Georgia, Villa Rica, GA




First Bank of Beverly Hills, Calabasas, CA




FirstCity Bank, Stockbridge, GA




MagnetBank, Salt Lake City, UT




Dollar Savings Bank of Newark, NJ




Bank of Alamo, Alamo, TN




AmTrade International Bank, Atlanta, GA




New Century Bank, Shelby Township, MI




NextBank, National Association, Phoenix, AZ




 Imagine being a NextBank depositor and reading this paragraph in the FDIC’s press release about your bank:

The FDIC received no bids for the bank's deposits. As a result, Monday morning the FDIC will mail checks to the customers of the failed bank for the amount of their insured deposits. Customers with more than $100,000 on deposit at the failed bank should contact the FDIC toll-free at 1-877-367-2719 and ask to speak with a claims agent.(5)

Deposit Flight

Furthermore, moral hazard among depositors can lead to what is known as "deposit flight." This may occur in times of financial distress or uncertainty. This is where depositors may hastily withdraw their funds from a bank they perceive as risky, exacerbating the institution's financial woes and potentially triggering a broader crisis.

Banking Crisis of 1980 - 1994

If, like me, you were in the business during the 1980s, you might recall the banking crisis that spanned from 1980 to 1994. The FDIC reports that during this period, 1,617 commercial and savings banks were affected and these institutions held $206.2 billion in assets. It led to the very first operating loss for the FDIC.(6)

A graph of a number of falls

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Source: FDIC (7)

The banking crisis spanning from 1980 to 1994 is a glaring reminder of the deep impact of moral hazard on the financial system's stability. This period saw numerous banks give in to risky lending practices and speculative investments, worsened by depositors' belief that all their funds were insulated from loss.

The lesson is that these events do happen and can happen again in the future.

Final Thought

Moral hazard poses a challenge in the banking industry. It affects the behavior of depositors and banks and can potentially undermine financial stability. I fear that with the government stepping in and finding a remedy for the last six bank failures, your clients may become the poster child for moral hazard.

As a client's financial advisor, it is important for you to recognize and address this with your clients who insist on keeping more than $250,000 at a bank. I believe that one day, there may not be a bank willing to take over a failed bank, and the FDIC will not be willing to insure all depositors, even those above the current $250,000 limit.

You do not want your clients to read a press release like the one NextBank depositors received highlighted above.

How The Dunham Insured Marketplace Can Help
Help clients find bank programs that offer multi-millions of FDIC insurance, like the Dunham Insured Deposit Marketplace (IDM). This program has up to $50 million in FDIC Insurance and what we consider a highly competitive APY. It allows your client to spread their deposits among various banks, saving time for them to research and find several banks that will fully protect their banking assets. Learn more by clicking here.


(1)    Bank Failure 2023 in Brief, by The FDIC, n/d,,a%20month%20within%20the%20graph.

(2)   Bank Failures in 2024, by The FDIC, n/d

(3)   Don’t worry too much about losing your bank cash. Bank-failure data don’t support panic over uninsured deposits, by Elanor Laise and Katie Marriner, April 21, 2023,

(4)   Bank Failures in Brief – Summary, by The FDIC, n/d,

(5)   FDIC Approves the Payout of Insured Deposits of NextBank, National Association, Phoenix, Arizona, by The FDIC Press Release, February 7, 2002,

(6)   Banking Crisis of the 1980s, by John Summa, updated October 6, 2021,the%201980s%20and%20early%201990s.&text=The%20cost%20of%20the%20crisis,U.S.%20General%20Accounting%20Office%20estimated.

(1)(7) The Banking Crisis of the 1980s and Early 1990s : Summary and Explanation, by The FDIC, n/d, › bank › historical › history PDF


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