How does deposit insurance impact the importance of minimum capital requirements?
Deposit insurance makes depositors less concerned about the credit worthiness of the bank they do business with since the state guarantees that they will get their assets back in case of a bankruptcy. This makes it possible for banks to take on bigger risks without losing customers.
Another way to look at it is from a moral hazard point of view. Since the bank doesn't bear the full risk of its operations, it has an incentive to take on more risk than is optimal. Oversized risks and moral hazard makes it necessary for regulators to specify minimum capital requirements.
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